Explain the Simulations tool in Quantitative Finance

Question

Explain the Simulations tool in Quantitative Finance.

Answer 1

Simulations: If the financial world is random then we can experiment along with the future by running simulations. For illustration, an asset price may be represented through its average growth and risk, therefore let’s simulate what could occur in the future to this random asset. When we were to take an approach we would need to run many, several simulations.

There would be little point in running just the one; we would like to notice a range of possible future scenarios. This can also be used for non-probabilistic problems. Just due to the similarities among mathematical equations, a model derived into a deterministic framework may be having a probabilistic interpretation.