Monte Carlo method and Performance bond: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
m (Spacing 22/8/13)
 
imported>Doug Williamson
(Expand 1st sentence.)
 
Line 1: Line 1:
In Value at Risk analysis, an alternative method for calculating the probability distribution (rather than using the Delta-normal method or the Historical simulation method).
''Trade finance.''


Monte Carlo simulations consist of two steps:
A performance bond is an instrument issued by a bank or an insurance company, in favour of a buyer, on behalf of a supplier, as additional assurance to the buyer that the supplier will perform its obligations under the supply contract. 


:First, a stochastic process for financial variables is specified as well as process parameters.
Such a bank bond or insurance company bond will be supported by an indemnity issued by the supplier in favour of the bank or insurance company.


:Both historical data and appropriate judgement can be used for such parameters as risk and correlations.
A performance bond can be called by the buyer in the event of any contract delays or defects in the supplier's performance of the contract.




:Second, fictitious price paths are simulated for all variables of interest. At each horizon considered, the portfolio is marked-to-market using full valuation. 
Also known as a ''performance guarantee''.


:A distribution of returns is eventually produced, from which a VaR figure can be measured.


== See also ==
* [[Bond]]
* [[Call]]
* [[Guarantee]]
* [[Indemnity]]
* [[Performance]]
* [[Retention bond]]
* [[Trade finance]]


Comparing the methods:
[[Category:Trade_finance]]
 
:1. The Delta-normal method is the simplest method to implement. 
 
:The main drawbacks are the assumption that risk factors have normal distributions, and the assumption that the assets are linear (in other words, that they do not contain options).
 
:2. The Historical simulation method is also relatively simple to implement. 
 
:The main drawback is that the historical information used may not adequately represent future probability distributions.  (This is also a drawback of the delta-normal method.)
 
 
Monte Carlo techniques are designed to address these shortcomings. 
 
Disadvantages of Monte Carlo methods include their relative complexity.
 
 
== See also ==
* [[Delta-normal method]]
* [[Historical simulation method]]
* [[Stochastic]]
* [[Value at risk]]

Revision as of 11:21, 4 April 2021

Trade finance.

A performance bond is an instrument issued by a bank or an insurance company, in favour of a buyer, on behalf of a supplier, as additional assurance to the buyer that the supplier will perform its obligations under the supply contract.

Such a bank bond or insurance company bond will be supported by an indemnity issued by the supplier in favour of the bank or insurance company.

A performance bond can be called by the buyer in the event of any contract delays or defects in the supplier's performance of the contract.


Also known as a performance guarantee.


See also