The Application of Monte Carlo Simulation in Finance, Economics and Operations Management

Monte Carlo simulation replaces deterministic values in equations with probabilistic values. Multiple solutions are computed by randomly sampling each probability distribution and an array of summary statistics are generated. This computational procedure represents a clear advance over discrete sensitivity analysis, scenario generation and what-if analysis for risk assessment. Crystal Ball is a simulation program that works within Microsoft Excel. Consequently, any problem that can be quantified in a spreadsheet can be the basis for a Monte Carlo simulation. This paper will explore and demonstrate the use of this computational procedure for such business applications as inventory management, portfolio optimization, project selection, reservation management, and benefits management. The conference presentation will also include a demonstration of the software application.