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Causal Capital ~ The Knowledge Capital Specialists

Monte Carlo Masterclass

It's been a huge first quarter for Causal Capital in 2018 with various risk and audit masterclasses across Malaysia, Beirut, Dubai, Kuwait and today; we are in Bahrain. A big thank you goes out to the teams that have been part of these applied hands-on learning sessions which tend to end up being a dive deep into the world of Monte Carlo modelling.

Risk Quantification | Causal Capital Risk & Audit Masterclasses

I always say that if I were on a desert island and only allowed to take one risk modelling tool with me, it would have to be Monte Carlo and for no other reason in that the stochastic method has such versatility. It connects the stakeholder directly to the measurement of uncertainty, but in a very tangible and pliable way that once learnt, is easy to repeat with additional or alternate risk modelling requirements.

I suppose there are many reasons why I gravitate to this specific risk modelling technique starting out with it enables the quantification of risk from quite diverse sources taking in market, credit or operational risk.

Some of the other benefits of Monte Carlo that makes it is a risk quantification winner would have to include:

» It allows Risk Analysts and Auditors to work directly across the ranges of identifiable factors that reference uncertainty, and you don't need to be an expert in calculus to be modelling stochastic dynamics quickly. During our masterclasses, we teach participants how to model uncertainty in this gritty manner with nothing else but Excel installed on their computers. All you need is an open mind.

» Another essential feature of Monte Carlo is that it can be easily bolted onto different risk measurement systems, be that a Real Option pricing solution or a Decision Tree, perhaps a Covariance Matrix for modelling a portfolio of assets. Either way, it's easy to integrate the simulator with these extended risk quantification techniques.

Finally, and perhaps most relevant is that Monte Carlo helps stakeholders, risk managers and auditors measure risk in a coherent manner. I can't express how key this is for taking risk assessments to a level where they are useful and not subjective, but method is a good place to start with the endeavour of assessing the effects of risk.

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