What is Monte Carlo Simulation?

Monte Carlo simulation is a computational technique that generates thousands of random interest rate paths to value financial assets with path-dependent features, like the prepayment option in whole loans. Each simulated path produces different cashflows (because prepayment behavior depends on the rate environment), and the asset's value is the average present value of cashflows across all paths. Monte Carlo is the industry standard for OAS calculation because it captures the full distribution of outcomes, not just a single scenario.

How LoanBook Uses Monte Carlo Simulation

LoanBook's OAS engine simulates Hull-White interest rate paths (200 in production pricing). Each path generates rate-sensitive prepayment projections via the LoanBook Prepay Model, producing dynamic cashflows. OAS is the spread that makes the average present value across all paths equal to the market price.