The Montecarlo Method In The Teaching Of Financial Mathematics

Abstract

The following work tries to show how through two mathematical models, one deterministic based on financial mathematics and the other probabilistic or stochastic based on the Monte Carlo method, the net present value of an investment project can be estimated.

Monte Carlo simulation is a statistical method used to solve complex mathematical problems through the generation of random variables (Eppen 2000).

The key to this method is to understand the term 'simulation'. Carrying out a simulation consists of repeating or duplicating the characteristics and behaviors of a real system. Thus, the main objective of the Monte Carlo simulation is to try to imitate the behavior of real variables in order, as far as possible, to analyze or predict how they will evolve.

Through simulation you can solve from very simple problems to very complex problems. Some problems can be solved with pen and paper. However, most require the use of computer programs such as Excel, Matlab, etc. Without these programs, solving certain problems would take a lot of time. (Wayne 2002).