Monte Carlo Simulation – Learning Roadmap

Pricing a financial instrument is not an exact science. There may be formulae, mathematics, derivation, proofs and exact models but in essence pricing financial securities in real-world markets is more along the lines of a science of approximation.

One approach to pricing these instruments is to use a Monte Carlo Simulator. A simulation is an experiment, and a MC simulator may be considered a machine that can churn out a series of experiments. The simulator will behave in a certain fashion (i.e. produce symmetric, asymmetric, normal and skewed, with thin tails or long fat tails) depending on the tool used to build the machine (i.e. the choice of distribution).

What are the prerequisites?

A useful introduction to some of the concepts mentioned in this roadmap are the following video courses:

What topics are covered?

How can I build Monte Carlo Simulators in Excel?

The Monte Carlo (MC) simulation concept is best explained through example and in the following courses we explain basic MC principles by building simulators in EXCEL for currencies, commodities and equities. We also explain the link between increasing the number of trials and increasing the accuracy of simulation results:

  • Computational Finance: Building Monte Carlo (MC) Simulators in Excel
  • Monte Carlo simulator with Historical Returns
  • Convergence and Variance Reduction Techniques for Option Pricing Models

What are some applications of Monte Carlo simulations that I will learn about in this course?

In the next stage we consider Monte Carlo simulation applications:

  • interest rate modeling
  • option pricing
  • understanding elements of the Black Scholes formula
  • calculation of Value at Risk

What are the additional topics I can read up on?

  • Option pricing using Binomial Trees
  • Derivative products
  • What is N(d1) and how is it different from N(d2)?
  • Interest Rate Simulation Crash Course

Related Video Courses

  • Option Pricing using Monte Carlo Simulation
  • Understanding N(d1) and N(d2)
  • Quant Crash Course

Related PDF Files

  • Interest Rate Simulation Crash Course

Related EXCEL Fles

  • Heath Jarrow Merton – HJM 3 – Factor Interest Rate Model
  • Monte Carlo Simulation – Commodity
  • Monte Carlo Simulation – Currency
  • Monte Carlo Simulation – Equity


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