Application of numerical methods, derivatives theory and Monte Carlo simulation in evaluating BM&F BOVESPA's POP (Protected and Participative Investment)

Abstract

ABSTRACT. This article presents a practical case in which two of the most efficient numerical procedures developed for derivative analysis are applied to evaluate the POP (Investment Protection with Participation), a structured operation created by São Paulo Stock Exchange -BM&FBOVESPA. The first procedure solves the differential equation through the use of implicit finite differences method. Due to its characteristics, the approach makes it possible to run sensitivity analysis as well as price estimation. In the second, the problem is solved by Monte Carlo simulation, which facilitates the identification of the probability related to the exercise of the embedded options.