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Mastering Risk Modelling

Mastering Risk Modelling

A Practical Guide to Modelling Uncertainty with Microsoft Excel
2nd Edition

Alastair Day

Nov 2008, Book with CD-ROM, 408 pages
ISBN13: 9780273719298
ISBN10: 0273719297
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Risks are everywhere in the business world. Mastering Risk Modelling provides the busy financial manager with useful tips andpractical templates for assessing, applying and modelling risk and uncertainty in Excel. The book is designed specifically to be of help to you if you don’t have time to start from scratch – it will improve your abilities in Excel and give you a library of basic examples that you can use as a basis for further development.

It covers:

• Review of model design

• Risk and uncertainty

• Credit risk

• Project finance

• Financial analysis

• Valuation

• Options

• Bonds

• Equities

• Value at risk

• Simulation

This second edition contains brand new chapters:

• Revised models

• More material on credit risk modelling e.g. portfolios, bankruptcy models

• Shows dual 2003/2007 Excel key strokes

• More theory especially on statistics in Excel

• Basic statistics in Excel – tools and methods

• Capacity to borrow and repay

• Finding optimum mix of risk and return

• Fixed income risk models

• Visual Basic approach

Conventions
Overview

1 Introduction

Scope of the book

Example model

Objectives of risk modelling

Summary

2 Review of model design

Introduction

Design objectives

Common errors

Excel features

Formats

Number formats

Lines and borders

Colour and patterns

Specific colour for inputs and results

Data validation

Controls – combo boxes and buttons

Conditional formatting

Use of functions and types of functions

Add-ins for more functions

Text and updated labels

Recording a version number, author, etc.

Using names

Pasting a names table

Comment cells

Graphics

Dynamic graphs to plot individual series

Data tables

Scenarios

Spreadsheet auditing

Summary

3 Risk and uncertainty

Introduction

Risk

Uncertainty

Response to risk

Methods

Summary

4 Project finance

Introduction

Requirements

Advantages

Risks

Risk analysis

Risk mitigation

Financial model

Inputs

Sensitivity and cost of capital

Construction, borrowing and output

Accounting schedules

Management analysis and summaries

Summary

5 Simulation

Introduction

Building blocks

Procedure

Real estate example

Summary

6 Financial analysis

Introduction

Process

Environment

Industry

Financial statements

Profit and loss

Balance sheet

Operating efficiency

Profitability

Financial structure

Core ratios

Market ratios

Trend analysis

Cash flow

Forecasts

Financial analysis

Summary

7 Credit risk

Cash flow

Cover ratios

Sustainability

Beaver’s model

Bathory model

Z scores

Springate analysis

Logit analysis

H-Factor model

Ratings agency

Summary

References

8 Valuation

Introduction

Inputs

Cash flow

Capital structure

Valuation and returns

Sensitivity analysis

Management summary

Summary

9 Bonds

Introduction

Bond prices

Interest rates

Yield

Duration and maturity

Convexity

Comparison

Summary

10 Options

Introduction

Options

Options example

Options hedging strategy

Black–Scholes

Simulation options pricing

Binomial model

Summary

11 Real options

Introduction

Project

Option to delay

Option to abandon

Option to expand

Summary

12 Equities

Introduction

Historic data

Returns summary

Simulation

Portfolio

Summary

References

13 Risk adjusted returns

Introduction

Economic capital

Risk-adjusted return on capital (RAROC)

Summary

14 Value at risk

Introduction

Single asset model

Two assets

Three asset portfolio

Summary

15 Credit value at risk

Introduction

Portfolio approach

Overview of components

Single asset

Two-bond portfolio

Simulation

Summary

Appendix: software installation and licence

Index