Monte Carlo Simulation and Value at Risk

Basically the way simulation works is by inputting all possible occurrences into a program (in accordance with their probabilities) and then examining the results and the probabilities of different results. For Value at Risk, best is to look at the example in the P4 Revision Notes (it is towards the end of the notes).

Thank you so much sir. There's another question. In bbp, terminal value is defined as "value of CFs occurring from period N+1 onwards i.e beyond the normal prediction horizon of periods 1 to N". Why is it "N+1"? It should rather be just, any CFs after N.

I realise that the way they have typed it is confusing for you. However, cash flows after N are those from one year after N, and 1 year after N is N + 1

Thanks for the help!

You are welcome :-)

I have seen your notes for VAR. But it just tells you the way to calculate it. I want to know the concept behind it. And what if we come across a value that isn't in the normal distribution table? Secondly i also wanted to confirm that the only assumption of MIRR is that cash flows are reinvested at the cost of capital of the company?

The notes do explain all you need to know about the concept - it is calculating the amount for which there is a 5% (or whatever) probability of falling below it. You will not have a value that is not in the table in the exam (nor really in real life since the tables go up to 0.1%!! It is almost always 5% or 1%) Correct about the MIRR assumption.

thank you! :)

You are welcome :-)

Hi, how often has monte carlo simulation and VAR being examined?

I don't remember Monte Carlo simulation ever having been specifically examined (although it may have been mentioned in a few answers to written parts of questions). VaR only came into the syllabus around four years ago and has been examined two or three times since.