attempt to represent a real-life system with a model to determine how a change in one or more variables affects the rest of the system, also called what-if analysis . Simulation will not provide optimization except by trial and error. It will provide comparisons of alternative systems or how a particular system works under specified conditions. It is a technique used for what-if scenarios. The advantages of simulation are: (1) when a model has been constructed, it may be used over and over to analyze different kinds of situations; (2) it allows modeling of systems whose solutions are too complex to express by one or several mathematical relationships; (3) it requires a much lower level of mathematical skill than do optimization model
in Asset-Liability Management, a technique of using operating account balances to test various pricing models and runoff scenarios and to determine in advance how the asset portfolio (loans) and liability portfolio (deposits) are likely to perform under different interest rate and pricing situations. The purpose is to test earnings performance under different interest rate hypotheses.
the process of representing the actions of one system by those of another. A computer simulation is a computer program that carries out a step-by-step representation of the actions of something in the real world. For example, a computer model of population growth can simulate the behavior of a real population.A deterministic simulation occurs when the future path of the system is exactly determined by the parameters of the system. A Monte Carlo simulation occurs when probabilities are known and a selection of random numbers is used to guide the system.
type of statistical modeling, using a computer, that attempts to mathematically predict the results of an action or series of actions, based on assumptions about how different variables affect each other. The values of certain variables are set to simulate a particular circumstance, so that the effect on the variable of interest can be measured. For example, the effect of a price change on a market can be simulated by making assumptions about the behavior of competitors and consumers in response to a price change.
