Skip to content

FRM Part I · FRM Exam Part I · Simulation and Bootstrapping

A Monte Carlo simulation estimates the price of an option, with a standard error of 0.40 using 10,000 independent trials. The desk wants the standard error cut to 0.10 with no variance reduction techniques. Approximately how many trials are needed?

Monte Carlo standard error falls with the square root of the number of trials. To cut it by a factor of four, from 0.40 to 0.10, trials must increase sixteenfold, from 10,000 to 160,000.

  1. A40,000
  2. B100,000
  3. C160,000Correct
  4. D1,000,000

Explanation

Standard error scales with 1/sqrt(N). Reducing it from 0.40 to 0.10 is a factor of 4, so N must rise by 4^2 = 16, giving 160,000. Choosing 40,000 reflects scaling linearly by 4 instead of squaring.

Did you get it right without looking?

One question tells you little. A timed set on Simulation and Bootstrapping shows your real accuracy, how long you take and where you lose marks.

Practise Simulation and BootstrappingFree diagnostic mock

More Simulation and Bootstrapping questions