Simulation Methods (FRM Part 1 2023 – Book 2 – Chapter 16)

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After completing this reading you should be able to:
- Describe the basic steps to conduct a Monte Carlo simulation.
- Describe ways to reduce Monte Carlo sampling error.
- Explain how to use antithetic variate technique to reduce Monte Carlo sampling error.
- Explain how to use control variates to reduce Monte Carlo sampling error and when it is effective.
- Describe the benefits of reusing sets of random number draws across Monte Carlo experiments and how to reuse them.
- Describe the bootstrapping method and its advantage over Monte Carlo simulation.
- Describe the pseudo-random number generation method and how a good simulation design alleviates the effects the choice of the seed has on the properties of the generated series.
- Describe situations where the bootstrapping method is ineffective.
- Describe disadvantages of the simulation approach to financial problem solving.