The Monte Carlo method differs from the techniques we have considered in preceding chapters: instead of applying quantitative mathematical expressions to arrive at an answer, we approximate or simulate the process, repeat the calculation a large number of times using randomly selected inputs chosen within a suitable range, and then average the result or draw other statistical conclusions. The method can be lengthy and provide only an approximate answer, but it may be the only available way to arrive at an answer.
Monte Carlo methods have been used in economics, in nuclear physics and to model traffic patterns. We will look at two main types of application: Monte Carlo simulation and Monte Carlo integration.
Random Numbers in Excel
Since the Monte Carlo method involves the use of random numbers, we will begin by examining how random numbers are produced and used within Excel.
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