Editing Monte Carlo methods in finance (section)

{{Short description|Probabilistic measurement methods}}
'''[[Monte Carlo method]]s are used in [[corporate finance]] and [[mathematical finance]]''' to value and analyze (complex) [[financial instrument|instrument]]s, [[portfolio (finance)|portfolio]]s and [[investment]]s by [[simulation|simulating]] the various sources of uncertainty affecting their value, and then determining the distribution of their value over the range of resultant outcomes.<ref name="puc">{{cite web | title = Real Options with Monte Carlo Simulation | url = http://www.puc-rio.br/marco.ind/monte-carlo.html | access-date = 2010-09-24 | archive-url = https://web.archive.org/web/20100318060412/http://www.puc-rio.br/marco.ind/monte-carlo.html | archive-date = 2010-03-18 | url-status = dead }}</ref><ref>{{cite web | title = Monte Carlo Simulation | url = http://www.palisade.com/risk/monte_carlo_simulation.asp | publisher = Palisade Corporation | year = 2010 |  access-date = 2010-09-24 }}</ref> This is usually done by help of [[stochastic asset model]]s. The advantage of Monte Carlo methods over other techniques increases as the dimensions (sources of uncertainty) of the problem increase.

Monte Carlo methods were first introduced to finance in 1964 by [[David B. Hertz]] through his ''[[Harvard Business Review]]'' article,<ref>{{cite magazine | title = Risk Analysis in Capital Investment | url = http://hbr.org/product/risk-analysis-in-capital-investment-harvard-busine/an/79504-PDF-ENG | magazine = Harvard Business Review | date = Sep 1, 1979 | pages = 12 | access-date = 2010-09-24 }}</ref> discussing their application in [[Corporate Finance]]. In 1977, [[Phelim Boyle]] pioneered the use of simulation in [[Derivative (finance)|derivative valuation]] in his seminal ''[[Journal of Financial Economics]]'' paper.<ref name="Phelim">{{cite journal | title = Options: A Monte Carlo approach | journal = Journal of Financial Economics | volume = 4 | issue = 3 | author = Boyle, Phelim P. | url =  http://ideas.repec.org/a/eee/jfinec/v4y1977i3p323-338.html | publisher = Journal of Financial Economics, Volume (Year): 4 (1977), Issue (Month): 3 (May) | pages =  323–338 | access-date = 2010-09-24 | year = 1977 | doi = 10.1016/0304-405X(77)90005-8 | url-access = subscription }}</ref>

This article discusses typical financial problems in which Monte Carlo methods are used. It also touches on the use of so-called "quasi-random" methods such as the use of [[Sobol sequence]]s.