Overview
The Monte Carlo Liqudity simulation utilizes simlulations to create a range of possible liquidity positions over the next period.
The simulation method can give a robust picture of a firms liquidity without too much complexity. It relies and being able to formulate a set of distributions for each of the sources and uses of cash over the next period, and possibly a set of correlations among the variables.
Once these distributions have been specified, the analyst simulates a draw from each distribution, in order to obtain one simulation of the firm's liquidity. Several simulations are performed in order to get an average and a spread of possible liquidity values.