Monte Carlo Simulation

Monte Carlo Simulation is besides Parametric VaR/CoVaR and Historic Simulation one of the most used VaR methods but Monte Carlo Simulation is the most powerful of them. A structured Monte Carlo simulation produces future price and VaR distributions of single financial position or portfolio applying numerical calculation procedures on a large set of possible scenarios derived from historic series of the market variables.

The implemented methodology improves the standard Monte Carlo approach including corrections of the standard deviation and the form of the normal distribution by a common post-processing. This affects the calculation results in regard to accuracy and stability if simulation is repeated.

The VaR results are very good for non-linear financial instruments such as options, long-term cash flow assets and pay off of structured products retaining the non-linear nature of the assets.

The Monte Carlo Simulation is applied successfully for Market VaR, Credit VaR and Spread VaR calculation in many modules of the products.

For more information see Market Risk Evaluation Using Monte Carlo Simulation.