- CFA Exams
- CFA Level I Exam
- Study Session 3. Quantitative Methods (2)
- Reading 9. Common Probability Distributions
- Subject 12. Monte Carlo Simulation

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**CFA Practice Question**

Monte Carlo simulation in finance involves ______.

A. repeated sampling from a historical data series

B. providing an estimate of volatility for use in option pricing models

C. the use of a computer to represent the operation of a complex financial system

**Explanation:**For example, Monte Carlo simulation is used for option pricing where numerous random paths for the price of an underlying asset are generated, each having an associated payoff. These payoffs are then discounted back to the present and averaged to get the option price. It is similarly used for pricing fixed income securities and interest rate derivatives.

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**User Contributed Comments**
1

User |
Comment |
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Shelton |
A. Bootstrapping B. Option Pricing Models |