CHAPTER EIGHT A gentle introduction to financial simulation 8.1. Setting the stage Simulation can be generally defined as experiments using models. In finance, there are many areas that use simulation techniques. These include the generation of artificial data when there are not enough real observations; the generation of scenarios; and the testing of assumptions, concepts, or strategies when real-world experiments are not advisable; to name just a few. Also, simulation can be useful when analytical solutions are not feasible; pricing and risk estimation problems are the usual suspects in this group. Finally, simulations can be used to get a better understanding of the