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Monte Carlo methods are numerical techniques used for solving complex mathematical problems. Monte Carlo methods become more efficient relative to other approaches as problem complexity increases. Monte Carlo methods were first used in physics from the first days of electronic computers. Today Monte Carlo methods are used extensively in quantitative finance, such as in valuation of complex derivative securities. For example, Asian options that do not have easy solutions via a Black Scholes type model are generally priced via Monte Carlo option pricing techniques. The Monte Carlo approach involves estimating a result based on averaging numerous trials. For each Monte Carlo trial, random or pseudo-random data are used. In addition to valuation problems, Monte Carlo methods are good for complex optimization problems. The Monte Carlo method was named after the famous Monte Carlo casino in Monaco. |
