Business and Personal Finance Dictionary

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• MONTE CARLO SIMULATION
  
  A technique for approximating a probability distribution by generating uniformly distributed pseudo random numbers and transforming them into the required sort of random numbers. In option pricing one ordinarily works with lognormal random interest rates, prices, and indexes. If one constructs the probability distributions correctly, then a Derivative Product's value equals the expected discounted value of its payoff (in the limit as the number of random paths approaches infinity). (See http://www.sbcm.com/hot/current.htm for more information)
  
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