Overview
Monte Carlo simulations use repeated random sampling to obtain numerical results. They are used to model the probability of different outcomes in processes that cannot easily be predicted due to the intervention of random variables.
How it Works
- Define a domain of possible inputs.
- Generate inputs randomly from a probability distribution.
- Perform a deterministic calculation on the inputs.
- Aggregate the results.
Use Cases
- Risk analysis in finance and insurance.
- Simulating physical systems in physics and engineering.
- Pricing complex financial derivatives.