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Simulation

In: Analyzing Financial Data and Implementing Financial Models Using R

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  • Clifford S. Ang

    (Compass Lexecon)

Abstract

Many asset pricing problems cannot be solved using closed-form formulas like the Black–Scholes–Merton model. This chapter discusses the application of simulation techniques in finance. We show different ways to model stock prices using a Geometric Brownian Motion, including simulating two correlated assets. We also show how simulations can be used in the Value-at-Risk calculation. We then show how simulations can be used in options pricing, including how to price several exotic options.

Suggested Citation

  • Clifford S. Ang, 2021. "Simulation," Springer Texts in Business and Economics, in: Analyzing Financial Data and Implementing Financial Models Using R, edition 2, chapter 0, pages 363-390, Springer.
    • Handle: RePEc:spr:sptchp:978-3-030-64155-9_11
    DOI: 10.1007/978-3-030-64155-9_11
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