This week saw my book “Financial Modelling in Practice: A Concise Guide for Intermediate and Advanced Level” (John Wiley&Sons) being available to a US audience on amazon.com (the original plan was for the launch date to be end December 2008).
I have high hopes for the book in the US market, being one of the most sophisticated markets for financial modelling and its applications. My belief is that many modellers have a reasonable knowledge of core Excel functionality, but desire to increase and consolidate their knowledge in a way that is prioritised, practical, and application-driven. In addition, I felt that there were few if any really good texts out there which help modellers to design, to structure and to build models which are relevant, accurate, and readily understandable. Many texts and training courses in the modelling area put their emphasis either on Excel functionality, or on financial theory, or on mathematical models, but hardly address the modelling process. Finally, most modelling texts either do not adequately treat the topic of risk analysis, or otherwise treat it from a mathematical perspective that is both inaccessible to many modellers and lacking in practical tools.
The book starts with a review of Excel functions that are generally most relevant for building intermediate and advanced level models, including functions relevant to statistical analysis. It then discusses the principles involved in designing, structuring and building relevant, accurate and readily understandable models. Topics covered include the use of sensitivity analysis, best practice modelling principles and related issues, and model auditing tools. A Chapter is devoted to the modelling of financial statements and of cash flow valuation using discounted cash flow analysis. It then moves on to discuss risk assessment and uncertainty modelling. Many practical applications and example models are presented in an intuitive and accessible way and the @RISK Monte Carlo software from Palisade Corporation is used to implement most models. The topic of options and real options modelling is then covered, treating these as a natural extension of risk modelling. Classical option valuation methods are discussed, as well as practical methods of modelling real options, including the implementation of decision trees. Chapter 6 covers VBA for financial modelling applications. The topics selected for inclusion were established by consideration of the core types of financial models that frequently require the use of VBA and provides beginners in this area with a solid base on which to discover the richer possibilities available to modellers by using VBA.
Dr. Michael Rees
Director of Training and Consulting