PONE-D-20-02638

The Value of Monte Carlo Model-Based Variance Reduction Technology in the Pricing of Financial Derivatives

PLOS ONE

Dear Miss Zhang,

Thank you for submitting your manuscript to PLOS ONE. After careful consideration, we feel that it has merit but does not fully meet PLOS ONE’s publication criteria as it currently stands. Therefore, we invite you to submit a revised version of the manuscript that addresses the points raised during the review process.

We would appreciate receiving your revised manuscript by Mar 23 2020 11:59PM. When you are ready to submit your revision, log on to https://www.editorialmanager.com/pone/ and select the 'Submissions Needing Revision' folder to locate your manuscript file.

If you would like to make changes to your financial disclosure, please include your updated statement in your cover letter.

To enhance the reproducibility of your results, we recommend that if applicable you deposit your laboratory protocols in protocols.io, where a protocol can be assigned its own identifier (DOI) such that it can be cited independently in the future. For instructions see: http://journals.plos.org/plosone/s/submission-guidelines#loc-laboratory-protocols

Please include the following items when submitting your revised manuscript:

• A rebuttal letter that responds to each point raised by the academic editor and reviewer(s). This letter should be uploaded as separate file and labeled 'Response to Reviewers'.
• A marked-up copy of your manuscript that highlights changes made to the original version. This file should be uploaded as separate file and labeled 'Revised Manuscript with Track Changes'.
• An unmarked version of your revised paper without tracked changes. This file should be uploaded as separate file and labeled 'Manuscript'.

Please note while forming your response, if your article is accepted, you may have the opportunity to make the peer review history publicly available. The record will include editor decision letters (with reviews) and your responses to reviewer comments. If eligible, we will contact you to opt in or out.

We look forward to receiving your revised manuscript.

Kind regards,

Zhihan Lv, Ph.D.

Academic Editor

PLOS ONE

Journal Requirements:

When submitting your revision, we need you to address these additional requirements:

1. Please ensure that your manuscript meets PLOS ONE's style requirements, including those for file naming. The PLOS ONE style templates can be found at http://www.plosone.org/attachments/PLOSOne_formatting_sample_main_body.pdf and http://www.plosone.org/attachments/PLOSOne_formatting_sample_title_authors_affiliations.pdf

2. PLOS requires an ORCID iD for the corresponding author in Editorial Manager on papers submitted after December 6th, 2016. Please ensure that you have an ORCID iD and that it is validated in Editorial Manager. To do this, go to ‘Update my Information’ (in the upper left-hand corner of the main menu), and click on the Fetch/Validate link next to the ORCID field. This will take you to the ORCID site and allow you to create a new iD or authenticate a pre-existing iD in Editorial Manager. Please see the following video for instructions on linking an ORCID iD to your Editorial Manager account: https://www.youtube.com/watch?v=_xcclfuvtxQ

3. Please include captions for your Supporting Information files at the end of your manuscript, and update any in-text citations to match accordingly. Please see our Supporting Information guidelines for more information: http://journals.plos.org/plosone/s/supporting-information.

[Note: HTML markup is below. Please do not edit.]

Reviewers' comments:

Reviewer's Responses to Questions

Comments to the Author

1. Is the manuscript technically sound, and do the data support the conclusions?

The manuscript must describe a technically sound piece of scientific research with data that supports the conclusions. Experiments must have been conducted rigorously, with appropriate controls, replication, and sample sizes. The conclusions must be drawn appropriately based on the data presented.

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

2. Has the statistical analysis been performed appropriately and rigorously?

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

3. Have the authors made all data underlying the findings in their manuscript fully available?

The PLOS Data policy requires authors to make all data underlying the findings described in their manuscript fully available without restriction, with rare exception (please refer to the Data Availability Statement in the manuscript PDF file). The data should be provided as part of the manuscript or its supporting information, or deposited to a public repository. For example, in addition to summary statistics, the data points behind means, medians and variance measures should be available. If there are restrictions on publicly sharing data—e.g. participant privacy or use of data from a third party—those must be specified.

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

4. Is the manuscript presented in an intelligible fashion and written in standard English?

PLOS ONE does not copyedit accepted manuscripts, so the language in submitted articles must be clear, correct, and unambiguous. Any typographical or grammatical errors should be corrected at revision, so please note any specific errors here.

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

5. Review Comments to the Author

Please use the space provided to explain your answers to the questions above. You may also include additional comments for the author, including concerns about dual publication, research ethics, or publication ethics. (Please upload your review as an attachment if it exceeds 20,000 characters)

Reviewer #1: Comments:

To reduce the errors in the pricing of financial derivatives and obtain accurate product value, this article adds a Monte Carlo model based on variance reduction technology to analyze price fluctuations and find the optimal holding time of financial derivatives for users, thereby reducing their holding risk. The results show that the Monte Carlo model-based variance reduction technology can significantly improve the simulation efficiency of financial derivatives pricing. In addition, the importance sampling method is used to optimize the selection, thereby making it closer to the theoretical values. The proposed method is easy to implement and has higher computational efficiency, which can ensure the financial benefits of users holding financial derivatives during the holding period. Therefore, this article is of great significance to the pricing of other products. The article should make the following amendments before publication:

1: In the abstract of this article, the authors mentioned: “In order to reduce the error in the pricing process of financial derivatives, as well as to obtain more accurate product values, the Monte Carlo model is added based on the variance reduction technology to analyze the price fluctuations and find the optimal holding time for users of financial derivatives, thereby reducing the risk of holding the financial derivatives.” Are these the research objectives of this article? Where are the research methods? Please propose the abstract section according to the structure of objective, method, result, and conclusion to make it clearer.

2: The Introduction section of the manuscript is long and has lots of paragraphs. The less-relevant contents of the Introduction section should be deleted to make the section concise. Please carefully revise this issue.

3: In the Literature Review section, the research analysis of the related fields is confusing. It is recommended that the analysis and research be performed in chronological order to make it more organized. Please confirm and revise.

4: In Section 3.2, the authors mentioned: “Importance sampling increases the sampling probability of a given sample space and increases the sampling weights of important regions so that the events that have an important effect on the simulation results are more likely to occur, thereby reducing the variance and improving the sampling efficiency and estimation accuracy.” Clearly, these are citations. Please confirm add corresponding citations to these contents.

5: In Section 4.1 of this article, the authors mentioned that Figure 2 shows the simulation results. How about the actual results? Are they significantly different from the simulation results? Please include the above-mentioned contents.

6: In Equations (14) and (15), is “P’” referring to the derivative of “P”? What does “P*” stand for? Please confirm and revise.

7: In Section 4.1 of this article, is the Monte Carlo simulation process related to European options a result? I think it is more appropriate to put it in the method section. Please confirm and revise.

8: In the Conclusion section of this article, in addition to the general description of the content of the study, the deficiencies, prospects, and significance of the study should be raised. Please confirm and revise.

Reviewer #2: This manuscript uses the Monte Carlo model-based variance reduction technology to improve the simulation efficiency of financial derivatives pricing. In addition, the importance sampling method is used to optimize the selection, thereby making it closer to the theoretical values. The proposed method is easy to implement and has higher computational efficiency, which can ensure the financial benefits of users holding financial derivatives during the holding period.

1. The introduction does not explain the general advantages of the proposed method and the innovations of this manuscript. Please briefly summarize these contents in the introduction section.

2. In Eq. (1), how is N defined? It is not explained in the text.

3. The use of “less than” signs in Eq. (3)-(5) is not standardized, please use the mathematical symbols correctly.

4. What are the meanings of E(X), λα, σ in the equations? Please confirm the meanings of all symbols in all equations are provided in the text.

5. The conclusion section summarizes the research results, but they are far from enough in terms of length. This section should also reflect the prospects for future research. Please revise the conclusion section.

6. In the reference list, please cite the latest research in the past 3 years as much as possible, and replace the out-dated literature.

Reviewer #3: The application of variance reduction based on Monte Carlo model in the pricing process of financial derivatives has a certain guiding role in the pricing of financial derivatives, which can help related companies adopt better strategies in pricing and attract customers while expanding the market share. In addition, at the same time, the market risk can be adjusted to varying degrees to avoid bringing greater losses to financial derivatives, thereby providing certain ideas for investment enthusiasts in selecting financial derivatives.

1. In the literature review section, if the literature has one or two authors, all the authors should be mentioned while citing the literature. For three or more authors, only the name of the first author is required. Please revise the citations in this paper.

2. Please check the equations in Section 3. The meaning of all the parameters needs to be explained in the text, and the parameters should be used correctly.

3. Is equation (2) correct? Please carefully revise it.

4. In the results and discussion section, the authors should compare their results with others to highlight the advantages of their method.

5. There are too few discussions in section 4. Please enrich the discussion of the results in this section.

6. In the conclusion section, there are too many contents of shortcomings and limitations, while too little contents of the summary of the research results. In addition, no conclusions of this study is given, nor any outlook for future research. This section is complicated and wordy. Please revise the conclusion section.

**********

6. PLOS authors have the option to publish the peer review history of their article (what does this mean?). If published, this will include your full peer review and any attached files.

If you choose “no”, your identity will remain anonymous but your review may still be made public.

Do you want your identity to be public for this peer review? For information about this choice, including consent withdrawal, please see our Privacy Policy.

Reviewer #1: Yes: Xin Gao

Reviewer #2: No

Reviewer #3: No

[NOTE: If reviewer comments were submitted as an attachment file, they will be attached to this email and accessible via the submission site. Please log into your account, locate the manuscript record, and check for the action link "View Attachments". If this link does not appear, there are no attachment files to be viewed.]

While revising your submission, please upload your figure files to the Preflight Analysis and Conversion Engine (PACE) digital diagnostic tool, https://pacev2.apexcovantage.com/. PACE helps ensure that figures meet PLOS requirements. To use PACE, you must first register as a user. Registration is free. Then, login and navigate to the UPLOAD tab, where you will find detailed instructions on how to use the tool. If you encounter any issues or have any questions when using PACE, please email us at figures@plos.org. Please note that Supporting Information files do not need this step.

The Value of Monte Carlo Model-Based Variance Reduction Technology in the Pricing of Financial Derivatives

PONE-D-20-02638R1

Dear Dr. Zhang,

We are pleased to inform you that your manuscript has been judged scientifically suitable for publication and will be formally accepted for publication once it complies with all outstanding technical requirements.

Within one week, you will receive an e-mail containing information on the amendments required prior to publication. When all required modifications have been addressed, you will receive a formal acceptance letter and your manuscript will proceed to our production department and be scheduled for publication.

Shortly after the formal acceptance letter is sent, an invoice for payment will follow. To ensure an efficient production and billing process, please log into Editorial Manager at https://www.editorialmanager.com/pone/, click the "Update My Information" link at the top of the page, and update your user information. If you have any billing related questions, please contact our Author Billing department directly at authorbilling@plos.org.

If your institution or institutions have a press office, please notify them about your upcoming paper to enable them to help maximize its impact. If they will be preparing press materials for this manuscript, you must inform our press team as soon as possible and no later than 48 hours after receiving the formal acceptance. Your manuscript will remain under strict press embargo until 2 pm Eastern Time on the date of publication. For more information, please contact onepress@plos.org.

With kind regards,

Zhihan Lv, Ph.D.

Academic Editor

PLOS ONE

Additional Editor Comments (optional):

Reviewers' comments:

Reviewer's Responses to Questions

Comments to the Author

1. If the authors have adequately addressed your comments raised in a previous round of review and you feel that this manuscript is now acceptable for publication, you may indicate that here to bypass the “Comments to the Author” section, enter your conflict of interest statement in the “Confidential to Editor” section, and submit your "Accept" recommendation.

Reviewer #1: All comments have been addressed

Reviewer #2: All comments have been addressed

Reviewer #3: All comments have been addressed

**********

2. Is the manuscript technically sound, and do the data support the conclusions?

The manuscript must describe a technically sound piece of scientific research with data that supports the conclusions. Experiments must have been conducted rigorously, with appropriate controls, replication, and sample sizes. The conclusions must be drawn appropriately based on the data presented.

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

3. Has the statistical analysis been performed appropriately and rigorously?

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

4. Have the authors made all data underlying the findings in their manuscript fully available?

The PLOS Data policy requires authors to make all data underlying the findings described in their manuscript fully available without restriction, with rare exception (please refer to the Data Availability Statement in the manuscript PDF file). The data should be provided as part of the manuscript or its supporting information, or deposited to a public repository. For example, in addition to summary statistics, the data points behind means, medians and variance measures should be available. If there are restrictions on publicly sharing data—e.g. participant privacy or use of data from a third party—those must be specified.

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

5. Is the manuscript presented in an intelligible fashion and written in standard English?

PLOS ONE does not copyedit accepted manuscripts, so the language in submitted articles must be clear, correct, and unambiguous. Any typographical or grammatical errors should be corrected at revision, so please note any specific errors here.

Reviewer #1: Yes

Reviewer #2: Yes

Reviewer #3: Yes

**********

6. Review Comments to the Author

Please use the space provided to explain your answers to the questions above. You may also include additional comments for the author, including concerns about dual publication, research ethics, or publication ethics. (Please upload your review as an attachment if it exceeds 20,000 characters)

Reviewer #1: This paper has been revised quickly and improved, has no problems in it. This paper can be accepted.

Reviewer #2: The authors have deal with the comments and suggestions of reviewers in a highly satisfactory and constructive manner. Therefore, I recommend this paper is mature enough to meet the publication quality.

The paper can be accepted.

Reviewer #3: The research question of this study is clear, the article structure is well organized, and the results seem reasonable.

Related work is surveyed and compared to the proposed method.

The paper can be accepted.

**********

7. PLOS authors have the option to publish the peer review history of their article (what does this mean?). If published, this will include your full peer review and any attached files.

If you choose “no”, your identity will remain anonymous but your review may still be made public.

Do you want your identity to be public for this peer review? For information about this choice, including consent withdrawal, please see our Privacy Policy.

Reviewer #1: Yes: Xin Gao

Reviewer #2: No

Reviewer #3: No