Deciding fixed or variable interest rate loans with Monte-Carlo simulation: A practice report from a hospital in Japan

Background: The choice between variable and fixed interest rates is crucial for managing hospitals with low profit margins. Formulas widely used by financial specialists to evaluate these options are highly complex and impractical for non-specialists to apply in daily decision-making. However, the Monte Carlo method, which uses random number estimation, is generally easier to implement. This report describes the practice of estimating the risks associated with refinancing from a fixed interest rate to a variable interest rate using the Monte Carlo method to assist decision-making of a hospital in Japan. Methods: We modeled the existing contract and offered conditions, estimated the interest payments using the Monte Carlo method, and calculated the ratio between them. Fluctuations in interest rates were incorporated as the parameter. We also conducted sensitivity analyses. Results: Based on the base case analysis, it was anticipated that refinancing would reduce interest payments, with the probability of 99.67%. The programming code for this analysis consisted of shorter than 100 lines. Discussion: The Monte Carlo method provides insights into the choice between fixed and variable interest rates without relying on complex financial engineering formulas. This approach may be particularly beneficial for hospital administrators, who are often not specialized in finance.