Simulation and Modelling - Old Questions
7. Explain Monte Carlo simulation method with an example.
5 marks
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Asked in Model Question
Monte Carlo simulation is a computerized mathematical technique to generate random sample data based on some known distribution for numerical experiments. This method is applied to risk quantitative analysis and decision making problems. This method is used by the professionals of various profiles such as finance, project management, energy, manufacturing, engineering, research & development, insurance, oil & gas, transportation, etc.
Following are the three important characteristics of Monte-Carlo method:
- Its output must generate random samples.
- Its input distribution must be known.
- Its result must be known while performing an experiment.
Flowchart for Monte Carlo simulation:
Fig: Flowchart of Monte Carlo simulation
Example:
Determining the value of PI using Monte Carlo method:
We use random number generation method to determine the sample points that lie inside or outside the curve. Let (x0, y0) be an initial guess for the sample point than from a linear congruential method of random number generation:
Xi+1 = (axi+c) mod m
Yi+1 = (ayi+c) mod m
Where a & c are constants, m is the upper limit of generated random number. If y<=yi then increment n.