Weighted Monte Carlo Simulation

A regular Monte Carlo (MC) simulation algorithm assigns each simulation scenario, or path, an identical probability weight. A weighted Monte Carlo (WMC), however,  allows a different probability to be assigned to each simulation path.  For example, we can choose the probabilities of each path in a manner such that the simulation is guaranteed to reproduce the prices of “benchmark” securities, whose prices are known from market data.  A simulation thus calibrated to benchmarks will then price off-market securities in a realistic manner.