## Monte Carlo Simulation

In its most basic form, the Monte Carlo simulation seeks to simulate real-world outcomes by showing a range of outcomes for a given variable set. For example, in the casino game roulette, Monte Carlo could simulate where the roulette ball lands for 10 consecutive rounds.

Excel's "RAND" function can generate random numbers in a given sample set. By simply setting the formula equal to RAND, Excel will generate a random number between 0 and 1. To detail the range of possible outcomes, Microsoft states that around 25% of the time, a number less than or equal to 0.25 should occur, and around 20% of the time the number will be at least 0.90, which is logical and intuitive, given the outcomes are restricted to such a tight range.

Excel offers a number of other ways to simulate random variable outcomes. For instance, the "NORMINV" function returns the inverse of the normal distribution for a specified mean and standard deviation.

## Black-Scholes Formula

The valuation of stock options can be incredibly complex and math-intensive. Excel offers a number of ways to price stock options, including the more plain vanilla puts and calls. The Black-Scholes formula is the most widely adopted measure for valuing an option. Its inputs are as follows:

S=Today's stock price
t=Duration of the option (in years)
X=Exercise priceÂ
r=Annual risk-free rate (This rate is assumed to be continuously compounded.)Â
Ïƒ=Annual volatility of stockÂ
y=Percentage of stock value paid annually in dividends

Excel doesn't have an actual formula employing Black-Scholes, but there are add-ins, as well as additional outside files that can be downloaded to help the user calculate the value of a put or call option.Â

Â

Guide To Excel For Finance: Conclusion
Related Articles
1. Investing

### Explaining the Monte Carlo Simulation

Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
2. Investing

### Monte Carlo Simulation With GBM

Learn how to estimate risk with the use of a Monte Carlo simulation to predict future events through a series of random trials.
3. Investing

### Create a Monte Carlo Simulation Using Excel

How to apply the Monte Carlo Simulation principles to a game of dice using Microsoft Excel.
4. Investing

### Understanding the Black-Scholes Model

The Black-Scholes model is a mathematical model of a financial market. From it, the Black-Scholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid ...

Stock simulators enable one to practice trading, but they have some disadvantages that you should be aware of, before transitioning to actual trading.
6. Investing

### Guide To Excel For Finance

Formulas, functions and features you need to know when using Excel for financial analysis.
7. Investing

### Scenario Analysis Provides Glimpse Of Portfolio Potential

This statistical method estimates how far a stock might fall in a worst-case scenario.

### How To Convert Value At Risk To Different Time Periods

Volatility is not the only way to measure risk. Learn about the "new science of risk management".

### 5 Reasons Why Your Software Won't Meet Fiduciary Standards

Many advisors are finding their technology doesn't meet their needs to uphold a fiduciary standard.