UCSI UNIVERSITY

FACULTY OF BUSINESS AND INFORMATION SCIENCE (FoBIS)

Course Outline cum Teaching Plan
1. Course Code & Title : AS303 Statistical Simulation for Financial Modelling
2. Programme : Bachelor of Science (Hons) Actuarial Science
Bachelor of Science (Hons) Actuarial Science & Finance
3. Semester and Year : May 2020
4. Credit Hour & : 3 credit hours
Contact Hours Lecture : 1.5 hours
Tutorial : 1.5 hours
Lab : 1.5 hours
5. Lecturer : Prof Kuru Ratnavelu
6. Tutor : Same as above
7. Mode of Delivery : Lecture, Tutorial and lab session
8. Objective : To develop the practical skills necessary to design, implement and
analyse discrete-event simulation systems, and to cover the basic
theory underlying discrete-event simulation methodologies in order
to enable a critical understanding of simulation output in financial
environments.
9. Learning Outcomes : After completing this unit, students will be able to: -
1. apply the principle of Monte Carlo simulation approach to
problem solving.
2. simulate both discrete and continuous random variables using
the inversion method, Acceptance-Rejection and polar
transformation, or other variance reduction techniques.
3. undertake Monte Carlo simulation of stochastic processes.
4. approximate simulation of diffusion via discretization
methods.
5. apply and evaluate the results using Monte Carlo simulation
methods in the solution of problems arising in finance and
insurance
10. Reading List : Main Text:
1. McLeish, D.L. (2005). Monte Carlo Simulation and Finance.
New Jersey: Wiley-Interscience.
Additional Text:
1. Paul Glasserman (2003). Monte Carlo Methods in Financial
Engineering. New York: Springer Verlag.
2. Chan, N.H.& Wong, H.Y. (2006). Simulation Techniques in
Financial Risk Management. New Jersey: Wiley-Interscience.
3. McDonald, R.L. (2012). Derivative Markets, 3rd Ed, Pearson
Addison Wesley.
4. Klugman, S.A., H H. Panjer, G E. Willmot. (2012). Loss
Models: From Data to Decision, 4th Ed, New Jersey: Wiley-
Interscience
11. Method of :
Assessment No. Method of Assessment Total
1. Coursework
(a) Lab 10% 50%
(b) Test 1 20%
(c) Test 2 20%
2. Final Examination 50%
GRAND TOTAL 100%

12. Remark : -

Lecture, Tutorial and Assessment Plan

Session Lecture Topic Tutorial Topic Assessment Reference
Wk 1 - 2 Philosophy of the Monte Tutorial 1 - 2 Klugman, etc.
Carlo Approach • Basic Monte Carlo (Chapter 21)
• Principles of Monte Carlo simulation procedure
• Example: Problem solved • Estimation of sample
using Monte Carlo simulation size
• Efficiency of simulation
estimators
Wk 3 - 7 Random Number Generation Tutorial 3-6 Test 1 in McLeish
• Linear congruential generator • Inverse transformation Week 7 (Chapter 3) &
• General sampling methods method Chan (Chapter
• Inverse transform method • Acceptance-Rejection 4)
• Acceptance-Rejection method method
• Normal Random Variables • Normal variate
and Vectors generation
• Generating Univariate Normal • Cholesky
• Generating Multivariate decomposition
Normal
Wk 8-9 Application of Simulation in Tutorial 7 – 8 Klugman, etc.
Statistics • Bootstrap and loss (Chapter 21)
• Bootstrap method for simulation
estimation of MSE
• Loss models
Wk 10-12 Simulation of Stochastic Tutorial 9 – 10 Test 2 in
Processes • Simulation of Week 12
• Introduction to continuous- Brownian Motion and
time stochastic processes, Lognormal process
Brownian Motion, Geometric with jumps
Brownian Motion
• Computer implementation of
Brownian Motion
• Processes with Jumps
• Financial Management
• Disability Insurance
Wk 11 - 13 Approximate Simulation of Tutorial 11 – 12 McLeish
Diffusion Using Discretization • Simulation of (Chapter 3)
Methods diffusion process
• The Euler Scheme
• Second order methods
 Wk 13 - 14 Variance Reduction Tutorial 13 – 14 McLeish
Techniques • Variance reduction (Chapter 4)
• Control Variates techniques Chan (Chapter
• Antithetic Variates 6)
• Stratified Sampling
• Importance Sampling

Information on Lab Practical Session

Week Activities Session (1.5 hours)
1–2 Generating non-uniform random variates I: Using Excel 3
built-in functions (2 weeks)
• Familiarization with Excel programming using Excel
• Generate non-uniform random variates using Excel built-
in functions
• Inversion method
• Test of randomness and uncorrelatedness
3–5 Introduction to VBA (3 weeks) 4.5
• Writing, editing and debugging VBA program
• Data types and declaration of data in VBA
• Sub and Function procedures
• User defined functions
6 Assignment (5%) 1.5

7-8 Generating non-uniform random variates II: Using VBA 3

functions (2 weeks)
• Box-Muller method
• Acceptance-Rejection method
• Cholesky decomposition
9 – 10 Diffusion processes (2 weeks) 3
• Brownian Motion
• Simulation on stock prices and interest rate
11 Lab Test 2 (5%) 1.5
Content from week 5 to week 9
12-14 Application of Simulation I (3 weeks) 4.5
• Pricing of options and related portfolio
• Estimate probability of ruin for an insurance business

This teaching plan is:

Prepared by: Moderated by: Approved by:

(Name: Prof Kuru Ratnavelu) (Name: Dr. Loh Yue Fang) (Name: Prof Ong Seng Huat)
Lecturer Moderator Head of School/Department
Date: 3rd May 2020 Date: Date: