If you’re seeking solutions to advanced and even esoteric problems, Advanced Analytical Models goes beyond theoretical discussions of modeling by facilitating a thorough understanding of concepts and their real-world applications—including the use of embedded functions and algorithms. This reliable resource will equip you with all the tools you need to quantitatively assess risk in a range of areas, whether you are a risk manager, business decision-maker, or investor.

Table of Contents:
Preface xv Software Applications xvii PART 1 Modeling Toolkit and Risk Simulator Applications 1 Introduction to the Modeling Toolkit Software 1 Introduction to Risk Simulator 2 Running a Monte Carlo Simulation 6 Using Forecast Charts and Confidence Intervals 16 Correlations and Precision Control 18 Tornado and Sensitivity Tools in Simulation 22 Sensitivity Analysis 29 Distributional Fitting: Single Variable and Multiple Variables 33 Bootstrap Simulation 35 Hypothesis Testing 40 Data Extraction, Saving Simulation Results, and Generating Reports 42 Regression and Forecasting Diagnostic Tool 42 Statistical Analysis Tool 52 Distributional Analysis Tool 54 Portfolio Optimization 56 Optimization with Discrete Integer Variables 70 Forecasting 72 1. Analytics—Central Limit Theorem 79 2. Analytics—Central Limit Theorem—Winning Lottery Numbers 84 3. Analytics—Flaw of Averages 88 4. Analytics—Mathematical Integration Approximation Model 93 5. Analytics—Projectile Motion 96 6. Analytics—Regression Diagnostics 100 7. Analytics—Ships in the Night 109 8. Analytics—Statistical Analysis 111 9. Analytics—Weighting of Ratios 123 10. Credit Analysis—Credit Premium 125 11. Credit Analysis—Credit Default Swaps and Credit Spread Options 127 12. Credit Analysis—Credit Risk Analysis and Effects on Prices 129 13. Credit Analysis—External Debt Ratings and Spread 131 14. Credit Analysis—Internal Credit Risk Rating Model 133 15. Credit Analysis—Profit Cost Analysis of New Credit 135 16. Debt Analysis—Asset-Equity Parity Model 137 17. Debt Analysis—Cox Model on Price and Yield of Risky Debt with Mean-Reverting Rates 138 18. Debt Analysis—Debt Repayment and Amortization 141 19. Debt Analysis—Debt Sensitivity Models 145 20. Debt Analysis—Merton Price of Risky Debt with Stochastic Asset and Interest 147 21. Debt Analysis—Vasicek Debt Option Valuation 149 22. Debt Analysis—Vasicek Price and Yield of Risky Debt 151 23. Decision Analysis—Decision Tree Basics 153 24. Decision Analysis—Decision Tree with EVPI, Minimax, and Bayes’ Theorem 158 25. Decision Analysis—Economic Order Quantity and Inventory Reorder Point 169 26. Decision Analysis—Economic Order Quantity and Optimal Manufacturing 170 27. Decision Analysis—Expected Utility Analysis 172 28. Decision Analysis—Inventory Control 174 29. Decision Analysis—Queuing Models 176 30. Exotic Options—Accruals on Basket of Assets 178 31. Exotic Options—American, Bermudan, and European Options with Sensitivities 180 32. Exotic Options—American Call Option on Foreign Exchange 182 33. Exotic Options—American Call Options on Index Futures 184 34. Exotic Options—American Call Option with Dividends 186 35. Exotic Options—Asian Lookback Options Using Arithmetic Averages 188 36. Exotic Options—Asian Lookback Options Using Geometric Averages 189 37. Exotic Options—Asset or Nothing Options 190 38. Exotic Options—Barrier Options 191 39. Exotic Options—Binary Digital Options 193 40. Exotic Options—Cash or Nothing Options 195 41. Exotic Options—Chooser Option (Simple Chooser) 196 42. Exotic Options—Chooser Option (Complex Chooser) 197 43. Exotic Options—Commodity Options 198 44. Exotic Options—Currency (Foreign Exchange) Options 199 45. Exotic Options—Double Barrier Options 200 46. Exotic Options—European Call Option with Dividends 201 47. Exotic Options—Exchange Assets Option 203 48. Exotic Options—Extreme Spreads Option 204 49. Exotic Options—Foreign Equity–Linked Foreign Exchange Options in Domestic Currency 205 50. Exotic Options—Foreign Equity Struck in Domestic Currency 207 51. Exotic Options—Foreign Equity with Fixed Exchange Rate 208 52. Exotic Options—Foreign Takeover Options 209 53. Exotic Options—Forward Start Options 210 54. Exotic Options—Futures and Forward Options 211 55. Exotic Options—Gap Options 212 56. Exotic Options—Graduated Barrier Options 213 57. Exotic Options—Index Options 214 58. Exotic Options—Inverse Gamma Out-of-the-Money Options 215 59. Exotic Options—Jump-Diffusion Options 216 60. Exotic Options—Leptokurtic and Skewed Options 217 61. Exotic Options—Lookback with Fixed Strike (Partial Time) 218 62. Exotic Options—Lookback with Fixed Strike 219 63. Exotic Options—Lookback with Floating Strike (Partial Time) 220 64. Exotic Options—Lookback with Floating Strike 221 65. Exotic Options—Min and Max of Two Assets 222 66. Exotic Options—Options on Options 223 67. Exotic Options—Option Collar 224 68. Exotic Options—Perpetual Options 225 69. Exotic Options—Range Accruals (Fairway Options) 226 70. Exotic Options—Simple Chooser 228 71. Exotic Options—Spread on Futures 229 72. Exotic Options—Supershare Options 230 73. Exotic Options—Time Switch Options 231 74. Exotic Options—Trading-Day Corrections 232 75. Exotic Options—Two-Asset Barrier Options 233 76. Exotic Options—Two Asset Cash or Nothing 234 77. Exotic Options—Two Correlated Assets Option 235 78. Exotic Options—Uneven Dividend Payments Option 237 79. Exotic Options—Writer Extendible Option 238 80. Forecasting—Data Diagnostics 239 81. Forecasting—Econometric, Correlations, and Multiple Regression Modeling 248 82. Forecasting—Exponential J-Growth Curves 254 83. Forecasting—Forecasting Manual Computations 257 84. Forecasting—Linear Interpolation and Nonlinear Spline Extrapolation 259 85. Forecasting—Logistic S-Growth Curves 264 86. Forecasting—Markov Chains and Market Share 267 87. Forecasting—Multiple Regression 269 88. Forecasting—Nonlinear Extrapolation and Forecasting 271 89. Forecasting—Stochastic Processes, Brownian Motion, Forecast Distribution at Horizon, Jump-Diffusion, and Mean-Reversion 273 90. Forecasting—Time-Series ARIMA 276 91. Forecasting—Time-Series Analysis 283 92. Industry Applications—Biotech Manufacturing Strategy 287 93. Industry Applications—Biotech Inlicensing Drug Deal Structuring 289 94. Industry Applications—Biotech Investment Valuation 291 95. Industry Application—Banking: Integrated Risk Management, Probability of Default, Economic Capital, Value at Risk, and Optimal Bank Portfolios 293 96. Industry Application—Electric/Utility: Optimal Power Contract Portfolios 321 97. Industry Application—IT—Information Security Intrusion Risk Management 329 98. Industry Applications—Insurance ALM Model 349 99. Operational Risk—Queuing Models at Bank Branches 354 100. Optimization—Continuous Portfolio Allocation 356 101. Optimization—Discrete Project Selection 362 102. Optimization—Inventory Optimization 366 103. Optimization—Investment Portfolio Allocation 372 104. Optimization—Investment Capital Allocation I (Basic Model) 373 105. Optimization—Investment Capital Allocation II (Advanced Model) 376 106. Optimization—Military Portfolio and Efficient Frontier 380 107. Optimization—Optimal Pricing with Elasticity 386 108. Optimization—Optimization of a Harvest Model 390 109. Optimization—Optimizing Ordinary Least Squares 394 110. Optimization—Stochastic Portfolio Allocation 400 111. Options Analysis—Binary Digital Instruments 405 112. Options Analysis—Inverse Floater Bond 407 113. Options Analysis—Options-Trading Strategies 413 114. Options Analysis—Options-Adjusted Spreads Lattice 420 115. Options Analysis—Options on Debt 422 116. Options Analysis—Five Plain Vanilla Options 424 117. Probability of Default—Bond Yields and Spreads (Market Comparable) 432 118. Probability of Default—Empirical Model 434 119. Probability of Default—External Options Model (Public Company) 437 120. Probability of Default—Merton Internal Options Model (Private Company) 441 121. Probability of Default—Merton Market Options Model (Industry Comparable) 442 122. Project Management—Cost Estimation Model 443 123. Project Management—Critical Path Analysis (CPM PERT GANTT) 446 124. Project Management—Project Timing 453 125. Real Estate—Commercial Real Estate ROI 456 126. Risk Analysis—Integrated Risk Analysis 460 127. Risk Analysis—Interest Rate Risk 472 128. Risk Analysis—Portfolio Risk Return Profiles 474 129. Risk Hedging—Delta-Gamma Hedging 477 130. Risk Hedging—Delta Hedging 478 131. Risk Hedging—Effects of Fixed versus Floating Rates 479 132. Risk Hedging—Foreign Exchange Cash Flow Model 481 133. Risk Hedging—Hedging Foreign Exchange Exposure 487 134. Sensitivity—Greeks 491 135. Sensitivity—Tornado and Sensitivity Charts Linear 496 136. Sensitivity—Tornado and Sensitivity Nonlinear 503 137. Simulation—Basic Simulation Model 510 138. Simulation—Best Surgical Team 517 139. Simulation—Correlated Simulation 525 140. Simulation—Correlation Effects on Risk 528 141. Simulation—Data Fitting 531 142. Simulation—Debt Repayment and Amortization 534 143. Simulation—Demand Curve and Elasticity Estimation 538 144. Simulation—Discounted Cash Flow, Return on Investment, and Volatility Estimates 542 145. Simulation—Infectious Diseases 546 146. Simulation—Recruitment Budget (Negative Binomial and Multidimensional Simulation) 548 147. Simulation—Retirement Funding with VBA Macros 556 148. Simulation—Roulette Wheel 560 149. Simulation—Time Value of Money 562 150. Six Sigma—Obtaining Statistical Probabilities, Basic Hypothesis Tests, Confidence Intervals, and Bootstrapping Statistics 571 151. Six Sigma—One- and Two-Sample Hypothesis Tests Using t-Tests, Z-Tests, F-Tests, ANOVA, and Nonparametric Tests (Friedman, Kruskal Wallis, Lilliefors, and Runs Tests) 590 152. Six Sigma—Sample Size Determination and Design of Experiments 623 153. Six Sigma—Statistical and Unit Capability Measures, Specification Levels, and Control Charts 627 154. Valuation—Buy versus Lease 631 155. Valuation—Banking: Classified Loan Borrowing Base 634 156. Valuation—Banking: Break-Even Inventory with Seasonal Lending Trial Balance Analysis 637 157. Valuation—Banking: Firm in Financial Distress 640 158. Valuation—Banking: Pricing Loan Fees Model 642 159. Valuation—Valuation Model 644 160. Value at Risk—Optimized and Simulated Portfolio VaR 647 161. Value at Risk—Options Delta Portfolio VaR 651 162. Value at Risk—Portfolio Operational and Credit Risk VaR Capital Adequacy 653 163. Value at Risk—Right-Tail Capital Requirements 657 164. Value at Risk—Static Covariance Method 661 165. Volatility—Implied Volatility 663 166. Volatility—Volatility Computations (Log Returns, Log Assets, Implied Volatility, Management Assumptions, EWMA, GARCH) 664 167. Yield Curve—CIR Model 673 168. Yield Curve—Curve Interpolation BIM Model 674 169. Yield Curve—Curve Interpolation NS Model 676 170. Yield Curve—Forward Rates from Spot Rates 678 171. Yield Curve—Term Structure of Volatility 679 172. Yield Curve—U.S. Treasury Risk-Free Rates and Cubic Spline Curves 680 173. Yield Curve—Vasicek Model 690 PART 2 Real Options SLS Applications 693 174. Introduction to the SLS Software 695 Single Asset and Single Phased Module 697 Multiple Asset or Multiple Phased SLS Module 704 Multinomial SLS Module 705 SLS Excel Solution Module 709 SLS Excel Functions Module 712 Lattice Maker Module 714 175. Employee Stock Options—Simple American Call Option 715 176. Employee Stock Options—Simple Bermudan Call Option with Vesting 716 177. Employee Stock Options—Simple European Call Option 719 178. Employee Stock Options—Suboptimal Exercise 720 179. Employee Stock Options—Vesting, Blackout, Suboptimal, Forfeiture 723 180. Exotic Options—American and European Lower Barrier Options 725 181. Exotic Options—American and European Upper Barrier Options 728 182. Exotic Options—American and European Double Barrier Options and Exotic Barriers 731 183. Exotic Options—Basic American, European, and Bermudan Call Options 734 184. Exotic Options—Basic American, European, and Bermudan Put Options 736 185. Real Options—American, European, Bermudan, and Customized Abandonment Options 739 186. Real Options—American, European, Bermudan, and Customized Contraction Options 749 187. Real Options—American, European, Bermudan, and Customized Expansion Options 756 188. Real Options—Contraction, Expansion, and Abandonment Options 763 189. Real Options—Dual Variable Rainbow Option Using Pentanomial Lattices 767 190. Real Options—Exotic Chooser Options 770 191. Real Options—Exotic Complex Floating American and European Chooser 771 192. Real Options—Jump-Diffusion Option Using Quadranomial Lattices 774 193. Real Options—Mean-Reverting Calls and Puts Using Trinomial Lattices 777 194. Real Options—Multiple Assets Competing Options 779 195. Real Options—Path-Dependent, Path-Independent, Mutually Exclusive, Non–Mutually Exclusive, and Complex Combinatorial Nested Options 781 196. Real Options—Sequential Compound Options 783 197. Real Options—Simultaneous Compound Options 791 198. Real Options—Simple Calls and Puts Using Trinomial Lattices 795 PART 3 Real Options Strategic Case Studies—Framing the Options 799 199. Real Options Strategic Cases—High-Tech Manufacturing: Build or Buy Decision with Real Options 801 200. Real Options Strategic Cases—Oil and Gas: Farm-Outs, Options to Defer, and Value of Information 810 201. Real Options Strategic Cases—Pharmaceutical Development: Value of Perfect Information and Optimal Trigger Values 814 202. Real Options Strategic Cases—Option to Switch Inputs 817 203. Valuation—Convertible Warrants with a Vesting Period and Put Protection 821 APPENDIX A List of Models 827 APPENDIX B List of Functions 837 APPENDIX C Understanding and Choosing the Right Probability Distributions 899 APPENDIX D Financial Statement Analysis 919 APPENDIX E Exotic Options Formulae 927 APPENDIX F Measures of Risk 941 APPENDIX G Mathematical Structures of Stochastic Processes 957 Glossary of Input Variables and Parameters in the Modeling Toolkit Software 963 About the DVD 995 About the Author 999 Index 1001