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Simulation Risk Modeling Method

Simulation Risk Modeling Method

Definition

A risk modeling method that requires a large number of computer-generated "trials" to approximate an answer. These methods are relatively robust and flexible, can accommodate complex relationships (e.g., so-called path-dependent relationships commonly found in options pricing), and depend less on simplifying assumptions and standardized probability distributions. The principal advantage over analytic methods is the ability to model virtually any real-world situation to a desired degree of precision. Often called Monte Carlo method.

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