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Welcome to Financial Models in Excel
Situation report

1 / 17

• Peter Raahauge
Department of Finance Office: A 5.21, Solbjerg plads Background: ˚ – PhD in economics (Arhus) 1999 – System developer (Simcorp) 1999-2000 – Assisting/Associate Professor/Lecturer (CBS) 2000-2012 2 / 17



Goal
The overall goal

• Practical implementation of financial theory
How to get there?

• Exercise-based (solving “real world” problems) • IT-based, everything based on Excel (and VBA) • Professional data source: Datastream
Results

• • • •

Better understanding of (known) financial theory Better Excel-skills Better feeling with real world data All in all: Easier to get started (at your thesis/job) 3 / 17

1

Examples of skills after the course
In half a work-day (or 4 hours exam :-) you will be able to solve one of these problems:

• • • •

Form a reasonable stock portfolio. Price an option, (Eur, Amr, Ber, Asian) Estimation of the term structure, (cubic spline). Predict the standard deviation of stock returns for next week, (basis for risk management).

- You know the theories, but it will take you half a “term paper” to get an answer if you have not tried it before. 4 / 17

Structure of the Lessons
15 lessons (2 hours lecture and exercises) 14 has the following structure: 1. 2. 3. 4. E-lec: Review of last weeks exercise E-lec: Financial theory and Excel for next exercise You solve the exercises (guiding solution available) Physical lecture: Your questions / problems /

Homepage... Very exercise based

• Little reading, lots of “hands on” computer work • Exam on computers, (like exercises) • Hence: Excel-routine raises your grade.
5 / 17

2

Plan for the Lessons
• Lesson 1:
– Lec 1.1 (now) (physical!) – Lec 1.2 Excel functionality (online)

• Lesson 2:
– Lec 2.1 Financial and statistical issues (online) – Lec 2.2 Introduction to VBA (online)

• Lesson 3-14:
– Lec x.1 Review of Exercise x-1 (online) – Lec x.2 Intro to Exercise x (online)

• Lesson 15:
– Lec 15.1 Review of Exercise 14 (online) – Lec 15.2 Exam info/questions (physical/online?) 6 / 17

E-lecture: Pros/cons
Pros:

• • • • •

Flexibility w.r.t. time: lectures “on demand” Flexibility w.r.t. place Reviewing possible Faster lectures (although ...) We have time for more questions/problem solving

Cons:

• Harder to keep attention (or?) • Lectures appear slower ... • No questions (delayed answers)
Previous years: E-lectures good solution! 7 / 17

3

What to do with Quality time?
How should we use the extra time?

• • • • •

Student presentations ? Reviewing same issues as in E-lectures ? Reviewing extra issues ? Two-way communication/discussions ? Helping you individually with exercises ? 8 / 17

Topics of the course, 15 lessons
Excel and VBA Lesson 1: An intro, else embedded in financial topics

Portfolio planning 2: 3: 4: 5: Getting data, mean return and covariance matrix, VBA Efficient frontier Efficient frontier with no short sale & test CAPM Performance evaluation 9 / 17

4

Topics of the course, 15 lessons (2)
Option pricing 6: 7: 8: 9: Black Scholes and implied volatility Volatility predictions, (GARCH etc) American and Bermuda options, binomial grids Asian options etc. Monte Carlo

Portfolio planning, a slight return 10: Portfolio choice under parameter uncertainty 10 / 17

Topics of the course, 15 lessons (3)
Bond pricing 11: 12: 13: 14: Bonds, duration, and immunization strategies Term structure estimation and advanced immunization Term structure, cubic spline Interest rates in binomial grids and callable bonds

Buffer lecture 15: Misc, Tips and tricks for the exam. 11 / 17

5

Curriculum
Primary literature

• Benninga Financial modeling, uses Excel, 3. ed. MIT • Exercises
Secondary (optional) literature

• Jackson and Staunton, Advanced modelling in finance using Excel and VBA, Wiley • Supplementary chapters, see General information document
12 / 17

What you should know already

Ask me what to do, if you are not familiar with;

• Portfolio theory, Option pricing, Bond analysis • Very basic spreadsheet knowledge
(else buy one of the “Learn Excel in 10 min”-books)

• Basic matrix algebra, optimization and statistics (incl linear regression).
13 / 17

6

Popular question: How much VBA?

VBA (Visual basic application) There is a bit of VBA many places in the course,

• Some VBA is OPTIONAL • Most VBA is “on top” of Excel implementation • Reason: Your backgrounds and abilities are very different
How much VBA at the exam? Max 10% will require VBA, probably less.

• Grade 10 possible with very basic VBA knowledge
14 / 17

What you will NOT learn

We use Excel as an extended pocket calculator, NOT:

• For making fancy spreadsheets • For developing applications for other people
Comment to VBA-aficionados: From now on, it affects the grade negatively if “interface programming” features make it harder for Censor and I to get an overview of the exam-answer/”term paper”. (It usually does!) 15 / 17

7

Practical stuff
Software

• • • •

I used Excel 2003 when developing the course. Now I use Excel 2010 Textbook: Excel 2003 Use Windows (2000/XP/Vista/7) if possible Apple computers have problems with VBA with new Excel 2008 (not the older version and Excel 2011?)

The exam:

• CBS-computer Excel 2007 (by Aug/Sep 2009): IMPORTANT: Be familiar with the Exam-computer. • Your own computer is NOT allowed anymore.
16 / 17

Questions?
Questions? 17 / 17

8

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