Summary

In this chapter, I introduce the very important Monte Carlo methodology, which we will appeal to many times later in this book. I began with a simple application of the technique and extended that simple model to cover increasingly complex problems ranging from a simple experiment to confirm the central limit theorem, to joint credit defaults, to value at risk with non-normal returns, and finally to copulas. Each of these problems is accompanied by a spreadsheet application included in the chapter examples.

Monte Carlo is an important class of simulation models and we shall appeal to these models later when we study options and derivatives as well as models of stock price dynamics, hedging tail risk, and many other applications.