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Python for Finance

You're reading from   Python for Finance Apply powerful finance models and quantitative analysis with Python

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Product type Paperback
Published in Jun 2017
Publisher
ISBN-13 9781787125698
Length 586 pages
Edition 2nd Edition
Languages
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Author (1):
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Yuxing Yan Yuxing Yan
Author Profile Icon Yuxing Yan
Yuxing Yan
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Table of Contents (17) Chapters Close

Preface 1. Python Basics FREE CHAPTER 2. Introduction to Python Modules 3. Time Value of Money 4. Sources of Data 5. Bond and Stock Valuation 6. Capital Asset Pricing Model 7. Multifactor Models and Performance Measures 8. Time-Series Analysis 9. Portfolio Theory 10. Options and Futures 11. Value at Risk 12. Monte Carlo Simulation 13. Credit Risk Analysis 14. Exotic Options 15. Volatility, Implied Volatility, ARCH, and GARCH Index

Using simulation to estimate the pi value

It is a good exercise to estimate π value by simulation. Let's draw a square with 2R as its side. If putting the largest circle inside the square, its radius will be R, described by the following equation:

Using simulation to estimate the pi value

On the other hand, the square is the product of its sides:

Using simulation to estimate the pi value

Dividing Equation (4) by Equation (5), we have the following result:

Using simulation to estimate the pi value

Reorganize it; we end up with the following equation:

Using simulation to estimate the pi value

In other words, the value of π will be 4* Scircle/Square. When running the simulation, we generate n pairs of x and y from a uniform distribution with a range of zero and 0.5. Then we estimate a distance that is the square root of the summation of the squared x and y, that is, Using simulation to estimate the pi value.

Obviously, when d is less than 0.5 (value of R), it will fall into the circle. We can imagine throwing a dart that falls into the circle. The value of the pi will take the following form:

Using simulation to estimate the pi value

The following graph illustrates these random points within a circle and within a square:

Using simulation to estimate the pi value

The...

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