Monte Carlo in cash flow forecast
Posted: January 14th, 2008, 4:23 am
by boon22
Hello,Can someone please explain me how to us MC in order to forecast future cash flow?Lets say that I should pay 100 this month, 200-in the next one, 300 after that... and so onHow can i use MC simulation in order to forecast what will be the next payment?Thanks
Monte Carlo in cash flow forecast
Posted: January 26th, 2008, 3:24 pm
by Jeans
I think you have to be a bit more specific.When you do a MC simulation you take a random variable and propagate it through time, you do this because you might not know the distribution function for the final state (or value or whatever) i.e. your cash flows,however, in order to do a MC sim, you still need some distribution function, be it of how much the cash flow of year t+1 is given you know the cash flow at year t or be it that the cash flow of any given year is the same irrespective of the other years (a stationary distribution)When you know this you can calculate e.g. your expected future cash flow by simulating 10 000 trajectories (i.e. future cash flow sample paths) from the sort of distribution functions spoken of above and taking the average of these trajectories at time T, the finishing time of your simulation... 10 years be something of a standard in corp. fin. after which you'd rather add a multiple of earnings or something like that. hope this helps