Monte Carlo Simulation vs. Historical Simulation

Historical simulation methods step on historical data in order to predict the future values of an unknown variable. The underline assumption is that past historical data is the best predictor for the distribution of the unknown factors describing the variable. So, for example, under the historical simulation method. if option prices are described by interest rates and market volatility, the best way to estimate these two parameters would be to consider how interest rates and market volatility behaved historically.

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