Financial Modeling

Getting Started

What is Modeling?
Blueprint Model

What is Modeling?
 If Carle had modeled it’s new parking garage it might have seen that the elevator from the Medivac Helipad on the roof to the Emergency Room on the ground floor was not big enough to accommodate a gurney.

What is Financial Modeling?
 A financial model illustrates relationships using real (realistic) numbers so that it can answer “what if?” questions or make projections.
Financial Theory Accounting & Financial Relationships

Financial Model

Output  r FV  P 1    n n*t Inputs .Model  A Model specifies the relationship between inputs and outputs.

112.3 1  $100.000 1     n 2  n*t 2*10  What happens to the Future Value if the interest rate increases? .4 0 $219.Deterministic Model  A Deterministic Model generates the same output every time you calculate   r 9 8%  FV  P 1   $241.171.

2%)  r FV  P 1    n n*t  Now what happens to Future Value? .Stochastic Model  A Stochastic Model uses random inputs and gets a different output every time you calculate. r~N(3%.

Attributes of Good Models      Realistic Error-Free Flexible Easy to use Easy to understand .

relationships.Attributes of Good Models  Realistic  Assumptions. and inputs must be realistic so that the outputs are useable.  had no demographic parameter .  Example: The S&P model that assigned AAA ratings to sub-prime mortgage derivatives  constrained the price change in houses to be positive.

Attributes of Good Models  Error Free  harder than it looks .

Attributes of Good Models  Flexible  This is a two edged sword. Develop the model to be easy and error free. Experience will tell you when a model gets too complicated and should be segregated into separate models for separate purposes. then add elements of flexibility. .

Attributes of Good Models  Easy to use  Use clear labels and descriptions Calendar Year 2007 2008 2009 2010 $ $ $ $ Planned saving in calendar year: vs t 2007 2008 2009 2010 $ $ $ $ St .

Attributes of Good Models  A financial model is only as good as the analyst using it.  The Harvard Interest Rate Model .

Course  This course was created in response to feedback from corporate recruiters. Stays with you Training Education Stays with the corporation .

Course Structure .

Course Structure  Models  Quizzes  Projects .

Models:  In each class we will develop a model or portion thereof  Each model will be given a due date (generally noon on the day following the class) .

Models  Models returned with comments  You are encouraged to resubmit corrected models for 80% of full marks.  The due date for re-submissions is noon on the day following the next class.  There are no re-re-submissions .

Note:  We will frequently work a model from class to class.  If you do not have the previous model completed then you will have nothing with which to work  If you miss a class remember that the template and class powerpoint in on Compass. .

Submit models through the course web page: .

edu/ finance/FinancialModeling/  Submissions are automatically time and date stamped and off loaded when due. .uiuc.business.Submission  http://www.

there are no re-submissions. .Quizzes:  There are several in-class Quizzes throughout the course  These are due at the end of the class period.  Quizzes are designed to test your modeling skills under pressure.

.Projects:  Presentation of a model developed  As an extension of a class model  For another class (so long as you have permission from the instructor)  For an internship or other work (so long as you have permission from the company for whom the model was developed)  Presentations are peer evaluated.

Professionalism  Professionalism requires collaboration.  I expect each student to develop their models independently. but not by doing their work for them. not cheating.  You are encouraged to help each other succeed. Copying another’s model is considered cheating and will result in a grade of 0. .

 Students working on games.Professionalism  Professionalism requires decorum  While in class you will work on Financial Modeling. email. or assignments for other classes will be asked to work elsewhere. . networking.

Financial Modeling Some notes before we begin .

Finance vs Modeling  The assumption is that you know the finance  If you need to refresh your memory  Financial Markets (Oltheten & Waspi)  Corporate Finance  Financial Modeling (Sengupta) .

it’s a feature .Excel Issues It’s not a bug.

*Institute of Electrical and Electronic Engineers .Mathematics  Excel uses the IEEE* Double Precision Floating Point number format (15 decimal places  Thus 1/3 + 1/3 + 1/3 = 0.999999999999999  If you want 1/3 + 1/3 + 1/3 = 1 you are now out of balance.

2008” and must be manipulated as text. 2008 is stored as “September 1.  September 1.05  1 September 2008 is stored as the number 39.692 and can be used in further calculation. .Data vs Format  Data can be formatted to look like anything  5% is stored as 0.

Excel Versions  Excel 2007 is not an upgrade of Excel. it “differs substantially from earlier versions”  BIF Trading Lab  Excel 2007 is the default  Excel 2003 must be started and then filled with a file .

.000  VBA is inconsistent with previous versions.Excel 2007  Buries functionality behind "user friendly" graphics  65535 is rendered as 100.

Excel 2007  Saves files as *.xlsx.xls before submitting . or *xlsb all of which are incompatible with previous versions of excel. *xltx.  Use Save as and save as *.

Excel 2007  Interview topic  Ask which version the company uses .

Multiplication Tables Exercise 1 .

Using Excel Formatting Your Workspace .

Toolbars  Customize your toolbars  Whenever you find yourself using the same command again and again  Add the command to your toolbar  Learn the shortcut .

xls from Compass Fin 490 Format Menu .xla Save all worksheets with the focus on cell A1  *.xla is an excel add-in  Download fin490.Fin490.

Fin490.xla .xla  On your own Computer  *.xla is saved as *xla and placed in the xlstart subdirectory of your computer  C:\Program Files  Microsoft Office  Office 11  Xlstart Fin490.

Fin490.xla can be parked on your flash drive and opened whenever you work .xla  In the classroom/lab  *.

ColorIndex = 45 .Bold = True Selection.ColorIndex = 55 With Selection.xla  Open Fin490.Font.xls  [Alt][F11] to open VBA  Click on Modules/Headings Interior color is light orange ' Keyboard Shortcut: Ctrl+Shift+T ' Selection.Interior .Customizing Fin490.Font.Pattern = xlSolid End With Font color is Indigo .

Customizing Fin490.xls  Pick your colors and edit the VBA  Test by using Ctrl+Shift+T  Format/ Sheet/ Hide  Add “Modified by ---” and date  Save as Fin490.xla  In Fin490.xla is an addIn .xla *.

xla you have an add in that does the same stuff but you see no spreadsheets .xls you have a spreadsheet that does stuff  When you open Fin490.xla  Fin490.Fin490.xla is an add In  When you open Fin490.

Financial Modeling Getting Started .

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