What is Monte Carlo Method?| Financial Risk Manager Online Certification | FRM Videos Video Lecture | Risk Management: An Essential Training - Management

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financial risk manager frm pub one of
the frm exam covers the fundamental
tools and techniques used in risk
management and the theories that
underlie their use Monte Carlo methods
welcome to the 21st lecture in the
preparation for the frm part 1 exam in
previous sessions we've learned the
basics of probability and statistics as
well as of regression these topics form
the basis for understanding more
advanced topics in managing a financial
risk in the previous module on
foundations of risk management we
learned about the investors choice and
portfolio selection and only briefly
discuss the inherent risk in this
session who will introduce one of the
important concepts of value at risk VAR
which is widely used in the management
of financial risk we will learn how to
calculate the risk through different
approaches such as the Monte Carlo
simulation agenda we will begin this
session with one of the prerequisites
for understanding the main concept of
Monte Carlo simulations we will discuss
about VAR or value at risk as the name
suggests it is the value of the
portfolio which is at risk of being lost
in the given time horizon we will learn
how to calculate this value with
different levels of confidence two
methods will be discussed in the
beginning Delta normal method and
historical simulation later in the
session we will learn to calculate the
VAR using monte carlo simulations we
will then learn about the famous Monte
Carlo simulation technique and apply it
to generate price paths of stocks and
then use it to calculate VAR or option
prices will also highlight some of the
techniques to increase the speed of the
simulations then we will introduce
simulations in cases where there is
correlation between the variables
finally we will end the session by
focusing on the limitations of the
simple Monte Carlo simulation technique
prerequisite value-at-risk you must have
seen that prices of stock change of
stock change in a random fashion if you
observe a large data for the pool
folio returns you will find that the
returns are normally distributed in the
graph we have shown that the returns are
normally distributed with a mean return
of 0 from the normal graph we can make
out that most of the returns lie around
0 and that the probability of very high
or low returns diminishes rapidly