Quantitative Methods & Risk·Monte Carlo & Distributions
Monte Carlo Intuition
Run the experiment a thousand times
Monte Carlo simulation is the technique of running the same probabilistic experiment thousands of times to estimate the distribution of outcomes. In trading, you specify a process for asset prices (drift, vol, possibly jumps or regime switches), simulate many paths forward, and observe the distribution of terminal P&L. The technique was developed at Los Alamos in the 1940s — every modern risk system descends from it.
Terminal distribution
Why not analytical?
For simple processes (constant drift + vol, single asset), closed-form solutions exist. The moment you add path-dependence, optionality, regime switches, or correlated multi-asset portfolios, Monte Carlo is the only way to get a tractable answer.