The secret shortcut to valuation when regular analysis fails: Using Monte Carlo and a ARIMA models with MA AR(1) or AR(2) simulation

(Last Updated On: June 22, 2012)
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The secret shortcut to valuation when regular analysis fails: Using Monte Carlo and a ARIMA models with MA AR(1) or AR(2) simulation

Hi there,

Are you interested in accurately valuing complex options and other derivatives … as well as fixed income instruments?

And doing it faster than your competition?

It’s not very straightforward to get an accurate valuation, you know. That’s because you’ll never have enough data to get a perfect picture of a given instrument or portfolio. You have to “approximate” the data or your computations will never finish!

Unless you know how to use the Monte Carlo method, of course. It’s an ingenious shortcut not many traders understand. Here’s how it works:

1. First you define a domain of possible inputs. Then …
2. Generate inputs randomly from a probability distribution over the domain. And …
3. Perform a deterministic computation on the inputs.
4. Finally, you aggregate the results.

Done correctly, this method is surprisingly accurate. Not just for individual instruments, but entire portfolios. You can even simulate an entire stock market to practice trading stocks without risk!

In fact, for situations with more than 3 or 4 degrees of freedom, formulae such as Black Scholes (i.e. analytic solutions) don’t even exist, while other numerical methods such as the Binomial options pricing model and finite difference methods face several difficulties and are impractical.

In these cases, Monte Carlo methods converge to the solution more quickly, require less memory and are easier to program.

The programming gets even easier with my latest offering to Premium members. You see, I’m just finishing up a walkthrough video that explains what you need to know about using Monte Carlo simulations.

It’s absolutely essential if you want to minimize your learning curve for this very powerful tool. Especially when I’m including all the relevant source code in R for you. It doesn’t get any easier than this!

Get get access to this tutorial now:


Other videos will cover Stochastic Volatility … Markov Chain … Autoregressive (AR(1)) and GARCH forecasting … Bootstrapping … Dynamic Linear Modeling … and more!

Learn about the rest of Premium benefits including our HFT and Algo Development courses, software tool kits, and more!

–> <–

Good trading,


NOTE I now post my TRADING ALERTS into my personal FACEBOOK ACCOUNT and TWITTER. Don't worry as I don't post stupid cat videos or what I eat!
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About caustic

Hi i there My name is Bryan Downing. I am part of a company called QuantLabs.Net This is specifically a company with a high profile blog about technology, trading, financial, investment, quant, etc. It posts things on how to do job interviews with large companies like Morgan Stanley, Bloomberg, Citibank, and IBM. It also posts different unique tips and tricks on Java, C++, or C programming. It posts about different techniques in learning about Matlab and building models or strategies. There is a lot here if you are into venturing into the financial world like quant or technical analysis. It also discusses the future generation of trading and programming Specialties: C++, Java, C#, Matlab, quant, models, strategies, technical analysis, linux, windows P.S. I have been known to be the worst typist. Do not be offended by it as I like to bang stuff out and put priorty of what I do over typing. Maybe one day I can get a full time copy editor to help out. Do note I prefer videos as they are much easier to produce so check out my many video at