Monte Carlo simulani

I will explain with a simple example.

Suppose you were trying to forecast the profit of your business next year and you decided that it was going to be affected by the rate of inflation and by the exchange rate – both of which you are uncertain about.

What you could do is set-up a spreadsheet to calculate the profit that would result from all possible combination of the inflation rate and the exchange rate. If you could estimate the probability of each of the various combinations, then you would be able to (for example) see which of the combinations gave more than a certain level of profit (maybe your target profit) and calculate the probability of it happening.

That’s what it is – looking at all possible outcomes and the probability of them occurring.

To write more would be really wasting both your time and my time – the chances of it being relevant in P4 other than a short written description are very remote indeed.

(If you want more, then you will find lots about it if you search Google, but (again) I really think you would be wasting time – assuming you understand the idea of what I have written above 🙂 )