Category:Monte Carlo simulation
A Monte Carlo simulation is an algorithm commonly used to obtain estimations of the expectation of a random variable. It is widely used in quantitative finance to estimate the payoff of an option.
The principal is very simple:
- simulate a lot of realizations of the random variable;
- the empirical mean is a good estimator of the expectation of the random variable.
The difficult points are:
- to generate pseudo random numbers
- to quantify the accuracy of the obtained estimation
- The en.wikipedia article about the Monte Carlo method.
- An algorithm for computing the inverse normal cumulative distribution function, by Peter J. Acklam.