When Pricing Through Monte Carlo Simulations on Trees We Are

question 4

Essay

When pricing through Monte Carlo simulations on trees we are implic- itly using risk neutral probabilities, this is also so when computing the spot rate duration. Is this correct? Shouldn't measures of sensitivity be computed with risk natural probabilities?

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Definitions:

Direct Labor-Hours

Total working hours accrued by employees integral to the manufacturing sequence.

Variable Overhead

Costs of production that vary directly with the volume of output, such as utilities and labor efficiency.

Direct Labor-Hours

The total hours worked by employees directly involved in manufacturing products, used as a basis for assigning labor costs to those products.

Manufacturing Overhead

All indirect costs associated with manufacturing, including costs for indirect labor, materials, and factory operations, that are not directly traceable to specific products.