Reflecting interdependencies between risk factors in corporate risk modeling using Monte Carlo simulation

Modern enterprises use various spreadsheet financial models to project their financial situation as well as to address potential entrepreneurial activity risk exposure. The most advanced solution is provided by the Monte Carlo approach that offers much broader possibilities in terms of entrepreneurial risk measurement than in the case of traditional methods. One of the most significant problems of the Monte Carlo approach is to identify, quantify and reflect interdependencies between variables that are risk factors in any risk analysis. The aim of this paper is to discuss possibilities to identify and quantify interdependencies in terms of historical data availability as well as to present a spreadsheet solution that would reflect interdependencies in risk simulation and which would be easy to implement. The solution presented is not the only one available, but it does not require too much effort to be implemented in any financial model developed in the form of a spreadsheet, especially by the individuals responsible for risk management in small and medium sized enterprises.