FIN 735: Financial Modeling

Lawrence P. Schrenk. Instructor

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Introduction to

Financial Modeling

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Overview
       

Object of The Course Administrative Details Requirements Schedule Resources Valuation The Nature of Modelling Excel and VBA
FIN 735: Financial Modeling

Lawrence P. Schrenk

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Overview
Practice Not Theory  Valuation  Mathematical Modelling


Lawrence P. Schrenk

FIN 735: Financial Modeling

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Overview (contd)
This course will teach concrete and practical financial valuation techniques using Microsoft Excel and VBA (VBA is a programming language that is included with Excel). It will cover a broad range of financial models in both corporate finance and investments, e.g., capital budgeting, portfolio theory, bond calculations, option models, etc. We will implement these models using Excel and its programming language VBA, and we will also use Monte Carlo simulation as a valuation technique.

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Administrative Details
     

Instructor: Instructor: Office: Office: Telephone: Telephone: E-Mail: Mail: Office Hours: Hours: Course Page

Lawrence P. Schrenk 485 BC 410-837-4919 410-837lschrenk@ubalt.edu Friday 9 AM to 1 PM

http://home.ubalt.edu/staff/ntsbschr/FIN%20735/fin_ 735.htm
Lawrence P. Schrenk FIN 735: Financial Modeling

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Administrative Details (contd)

Software: Software: Microsoft Excel (VBA included)  Grading: Homework (10 at 10%) 100% Grading:


Lawrence P. Schrenk

FIN 735: Financial Modeling

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Requirements


Courses
 FIN

640 and Statistics at a minimum  Any other finance courses helpful



Software Experience
 Basic

knowledge of Excel  Basic knowledge of programming  No previous knowledge of VBA expected

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Schedule


Part One: Introduction to the Tools

  

Basic Issues Excel for Financial Modeling and Simulation Introduction to VBA

  

Part Two: Modeling in Corporate Finance



Capital Budgeting Stock Price Paths Portfolios Capital Asset Pricing Model (CAPM)

Part Three: Modeling Equity

  

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Schedule (conts)


Part Four: Modeling Debt

 Duration  Immunization  Interest

Rate Models

Part Five: Modeling Derivative Securities

 Introduction

to Options  Binomial Model  Black-Scholes Model Black-

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Not to Be Covered
Portfolio Allocation  Advanced Asset Pricing Models  Advanced Interest Rate Models  Advanced Derivative Models  Risk Management

 Value-at-Risk Value-at-

(VaR)  Stress Testing, etc.

Lawrence P. Schrenk FIN 735: Financial Modeling

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Resources
 

Textbook: Textbook: There is no required textbook. On Reserve: Reserve:

  

Simon Benninga and Benjamin Czaczkes. Financial Modeling (with CD-ROM). 2nd ed. MIT Press, 2000. CDMary Jackson and Mike Staunton. Advanced Modelling in Finance Using Excel and VBA. Wiley & Sons, 2001). VBA. Chandan Sengupta. Financial Modeling Using Excel and VBA. VBA. New York, 2004. Ed Robinson. Excel VBA. Barnes & Noble Books, 2004. VBA.

Optional:


Lawrence P. Schrenk

FIN 735: Financial Modeling

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Valuation


Finance as Valuation
 What

is the value of?

A stock A bond A derivative security A project A portfolio A contract

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Valuation (contd)


Inputs to Valuation
 Cash

Flows

examples
 Probabilities

examples
 Risk

examples

Lawrence P. Schrenk

FIN 735: Financial Modeling

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The Nature of Modelling



Why Model Anything



Model as a generalization
Beyond particular cases

 

Models extend knowledge Models are testable

Therefore, scientific???

Lawrence P. Schrenk

FIN 735: Financial Modeling

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The Nature of Modelling (contd)



A Progression
 Empirical

Data

 Conceptual

Model

 Mathematical
Lawrence P. Schrenk

Model
FIN 735: Financial Modeling

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The Nature of Modelling (contd)



Types of Mathematical Models

 Closed-Form Closed-

Solution

 Numerical

Model

 Simulation

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Excel and VBA



Spreadsheet Modeling
 Excel  Cells  Slow  Not

and Relations between Cells

Flexible  Types of Models

Numerical Models Simulation (but not very effectively)
Lawrence P. Schrenk FIN 735: Financial Modeling

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Excel and VBA (contd)



Programming
 VBA  Independent  Fast  Flexible  Types

Program

of Models

ClosedClosed-Form Solutions Numerical Models Simulation

Lawrence P. Schrenk FIN 735: Financial Modeling

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Excel and VBA (contd)



VBA
 Standard

language for basic finance easily with Excel

 Integrates  Can  Can  Can

use Excel to import large quantities of data access Excel functions use Excel for graphs, etc.
FIN 735: Financial Modeling

Lawrence P. Schrenk

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Excel and VBA (contd)



Alternatives to VBA
 Speed

(Real(Real-Time Applications) Sophistication

C++
 Mathematical

Mathematica MATLAB

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Excel and VBA (contd)



Two Uses of VBA

 As

a language to control Excel

E.g. Press a button to run a VBA program that causes all cells with numbers greater than six to become bold.
 As

an independent programming language

E. g. Minimal interactive with Excel

Lawrence P. Schrenk

FIN 735: Financial Modeling

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Excel and VBA (contd)

What do you know about Excel and what is your experience?  Basic introduction to Excel


Lawrence P. Schrenk

FIN 735: Financial Modeling