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Monte Carlo Simulator with Historical Returns
About the course
The course consists of an EXCEL file which presents a variation of the Monte Carlo simulation model for commodity prices. In the conventional model the random numbers are obtained by normally scaling EXCEL’s RAND() function. In this version however the random numbers are obtained from the commodity’s historical price series.
The methodology followed is as follows:
- A daily return series from historical Gold spot prices and zt’s based on this historical return series are calculated
- The resulting zt’s are indexed
- Random numbers using EXCEL’s RAND() function are generated
- Indexed historical daily return based on random numbers are selected
- A path of prices including a terminal price at the end of the duration is calculated for each of 365 time steps
- Terminal prices for 25 scenarios using EXCEL’s Data Table functionality are generated
- Average simulated terminal price across the 25 scenarios and the actual terminal price at the end of the duration are compared
- Simulated price path and actual price path over the given duration are plotted
- Histograms of historical returns from the simulated path and that of the actual price series are generated
The file also includes a tab for the calculation of simulated price path using the original Monte Carlo simulation model for result comparison.
The guide includes:
- A description of the construction of a hybrid Monte Carlo simulation model that randomly picks returns from the actual historical return distribution instead of using the normal distribution assumption that the original simulator utilizes. Back testing is performed to compare the results with the original model.
- An application of the hybrid model to calculate VaR for commodites/ currencies.
After taking this course you will be able to:
- Simulate the price of a given security use an alternate Monte Carlo simulation model that uses historical returns instead of normal distribution generated returns
- Compare the results of the model with actual price history
- Compare the results of the model with the results from the original Monte Carlo simulation model
The candidate should have some familiarity with basic mathematics, statistics, probability and EXCEL.
The course is aimed at professionals who deal with pricing and, valuation and risk management within banks, insurance companies, mutual funds, as well as finance departments of non-financial organizations.