Champion
Registered: Nov 2003
Posts: 534 |
11-30-05 11:47 PM
Quote from sabotage:
Monte Carlo simulation as a tool sounds more elaborate than what it really is. That is not to say that you cannot use it for elaborate analysis.
You need to determine what you need to figure out. For instance, what is the probability of a coin flipping head or tails. Create a process that acts like a coin: for instance a binary random variable in an excel sheet, that returns 0 or 1, with a 50% chance each. Generate the variable 10000 times and count how many times you get 1 and 0. You result will tend to 50%.
You can price an option using Monte Carlo simulation. This time, however, generate a Brownian motion price path with a given volatility. Run it many times and see what your option is worth on expiry and discount. The outcome should quickly converge to the Black and Scholes value.
In practical terms how you would apply the Monto Carlo simulation to the price path of index futures or an index such as the Dow? Cheers.
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