Mathematics

Monte Carlo Simulation

Estimating a quantity by averaging over many random simulations.

Error falls like 1/sqrt(N) - four times the samples for half the error.

The property that makes it indispensable: that rate is independent of dimension. Grid methods degrade exponentially with dimensions; Monte Carlo does not, which is why it wins for high-dimensional pricing despite being slow in one dimension.

Variance reduction beats brute force. Antithetic variates exploit symmetry, control variates subtract a correlated quantity with a known value, and importance sampling concentrates draws where the payoff is non-zero - essential for deep out-of-the-money options where almost all paths contribute nothing.

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Numerical Methods for Quant Interviews

Root finding, Monte Carlo and floating point - the computational topics that come up in pricing and research rounds.

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