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Advanced Analytical Models: Over 800 Models and 300 Applications from the Basel II Accord to Wall Street and Beyond

ISBN: 978-0-470-17921-5
1014 pages
May 2008
Advanced Analytical Models: Over 800 Models and 300 Applications from the Basel II Accord to Wall Street and Beyond  (047017921X) cover image
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.
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Preface.

Software Applications.

Part 1: Modeling Toolkit and Risk Simulator Applications.

Introduction to the Modeling Toolkit Software.

Introduction to Risk Simulator.

Running a Monte Carlo Simulation.

Using Forecast Charts and Confidence Intervals.

Correlations and Precision Control.

Tornado and Sensitivity Tools in Simulation.

Sensitivity Analysis.

Distributional Fitting: Single Variable and Multiple Variables.

Bootstrap Simulation.

Hypothesis Testing.

Data Extraction, Saving Simulation Results, and Generating Reports.

Regression and Forecasting Diagnostic Tool.

Statistical Analysis Tool.

Distributional Analysis Tool.

Portfolio Optimization.

Optimization with Discrete Integer Variables.

Forecasting.

1. Analytics—Central Limit Theorem.

2. Analytics—Central Limit Theorem—Winning Lottery Numbers.

3. Analytics—Flaw of Averages.

4. Analytics—Mathematical Integration Approximation Model.

5. Analytics—Projectile Motion.

6. Analytics—Regression Diagnostics.

7. Analytics—Ships in the Night.

8. Analytics—Statistical Analysis.

9. Analytics—Weighting of Ratios.

10. Credit Analysis—Credit Premium.

11. Credit Analysis—Credit Default Swaps and Credit Spread Options.

12. Credit Analysis—Credit Risk Analysis and Effects on Prices.

13. Credit Analysis—External Debt Ratings and Spread.

14. Credit Analysis—Internal Credit Risk Rating Model.

15. Credit Analysis—Profit Cost Analysis of New Credit.

16. Debt Analysis—Asset-Equity Parity Model.

17. Debt Analysis—Cox Model on Price and Yield of Risky Debt with Mean-Reverting Rates.

18. Debt Analysis—Debt Repayment and Amortization.

19. Debt Analysis—Debt Sensitivity Models.

20. Debt Analysis—Merton Price of Risky Debt with Stochastic Asset and Interest.

21. Debt Analysis—Vasicek Debt Option Valuation.

22. Debt Analysis—Vasicek Price and Yield of Risky Debt.

23. Decision Analysis—Decision Tree Basics.

24. Decision Analysis—Decision Tree with EVPI, Minimax, and Bayes’ Theorem.

25. Decision Analysis—Economic Order Quantity and Inventory Reorder Point.

26. Decision Analysis—Economic Order Quantity and Optimal Manufacturing.

27. Decision Analysis—Expected Utility Analysis.

28. Decision Analysis—Inventory Control.

29. Decision Analysis—Queuing Models.

30. Exotic Options—Accruals on Basket of Assets.

31. Exotic Options—American, Bermudan, and European Options with Sensitivities.

32. Exotic Options—American Call Option on Foreign Exchange.

33. Exotic Options—American Call Options on Index Futures.

34. Exotic Options—American Call Option with Dividends.

35. Exotic Options—Asian Lookback Options Using Arithmetic Averages.

36. Exotic Options—Asian Lookback Options Using Geometric Averages.

37. Exotic Options—Asset or Nothing Options.

38. Exotic Options—Barrier Options.

39. Exotic Options—Binary Digital Options.

40. Exotic Options—Cash or Nothing Options.

41. Exotic Options—Chooser Option (Simple Chooser).

42. Exotic Options—Chooser Option (Complex Chooser).

43. Exotic Options—Commodity Options.

44. Exotic Options—Currency (Foreign Exchange) Options.

45. Exotic Options—Double Barrier Options.

46. Exotic Options—European Call Option with Dividends.

47. Exotic Options—Exchange Assets Option.

48. Exotic Options—Extreme Spreads Option.

49. Exotic Options—Foreign Equity–Linked Foreign Exchange Options in Domestic Currency.

50. Exotic Options—Foreign Equity Struck in Domestic Currency.

51. Exotic Options—Foreign Equity with Fixed Exchange Rate.

52. Exotic Options—Foreign Takeover Options.

53. Exotic Options—Forward Start Options.

54. Exotic Options—Futures and Forward Options.

55. Exotic Options—Gap Options.

56. Exotic Options—Graduated Barrier Options.

57. Exotic Options—Index Options.

58. Exotic Options—Inverse Gamma Out-of-the-Money Options.

59. Exotic Options—Jump-Diffusion Options.

60. Exotic Options—Leptokurtic and Skewed Options.

61. Exotic Options—Lookback with Fixed Strike (Partial Time).

62. Exotic Options—Lookback with Fixed Strike.

63. Exotic Options—Lookback with Floating Strike (Partial Time).

64. Exotic Options—Lookback with Floating Strike.

65. Exotic Options—Min and Max of Two Assets.

66. Exotic Options—Options on Options.

67. Exotic Options—Option Collar.

68. Exotic Options—Perpetual Options.

69. Exotic Options—Range Accruals (Fairway Options).

70. Exotic Options—Simple Chooser.

71. Exotic Options—Spread on Futures.

72. Exotic Options—Supershare Options.

73. Exotic Options—Time Switch Options.

74. Exotic Options—Trading-Day Corrections.

75. Exotic Options—Two-Asset Barrier Options.

76. Exotic Options—Two Asset Cash or Nothing.

77. Exotic Options—Two Correlated Assets Option.

78. Exotic Options—Uneven Dividend Payments Option.

79. Exotic Options—Writer Extendible Option.

80. Forecasting—Data Diagnostics.

81. Forecasting—Econometric, Correlations, and Multiple Regression Modeling.

82. Forecasting—Exponential J-Growth Curves.

83. Forecasting—Forecasting Manual Computations.

84. Forecasting—Linear Interpolation and Nonlinear Spline Extrapolation.

85. Forecasting—Logistic S-Growth Curves.

86. Forecasting—Markov Chains and Market Share.

87. Forecasting—Multiple Regression.

88. Forecasting—Nonlinear Extrapolation and Forecasting.

89. Forecasting—Stochastic Processes, Brownian Motion, Forecast Distribution at Horizon, Jump-Diffusion, and Mean-Reversion.

90. Forecasting—Time-Series ARIMA.

91. Forecasting—Time-Series Analysis.

92. Industry Applications—Biotech Manufacturing Strategy.

93. Industry Applications—Biotech Inlicensing Drug Deal Structuring.

94. Industry Applications—Biotech Investment Valuation.

95. Industry Application—Banking: Integrated Risk Management, Probability of Default, Economic Capital, Value at Risk, and Optimal Bank Portfolios.

96. Industry Application—Electric/Utility: Optimal Power Contract Portfolios.

97. Industry Application—IT—Information Security Intrusion Risk Management.

98. Industry Applications—Insurance ALM Model.

99. Operational Risk—Queuing Models at Bank Branches.

100. Optimization—Continuous Portfolio Allocation.

101. Optimization—Discrete Project Selection.

102. Optimization—Inventory Optimization.

103. Optimization—Investment Portfolio Allocation.

104. Optimization—Investment Capital Allocation I (Basic Model).

105. Optimization—Investment Capital Allocation II (Advanced Model).

106. Optimization—Military Portfolio and Efficient Frontier.

107. Optimization—Optimal Pricing with Elasticity.

108. Optimization—Optimization of a Harvest Model.

109. Optimization—Optimizing Ordinary Least Squares.

110. Optimization—Stochastic Portfolio Allocation.

111. Options Analysis—Binary Digital Instruments.

112. Options Analysis—Inverse Floater Bond.

113. Options Analysis—Options-Trading Strategies.

114. Options Analysis—Options-Adjusted Spreads Lattice.

115. Options Analysis—Options on Debt.

116. Options Analysis—Five Plain Vanilla Options.

117. Probability of Default—Bond Yields and Spreads (Market Comparable).

118. Probability of Default—Empirical Model.

119. Probability of Default—External Options Model (Public Company).

120. Probability of Default—Merton Internal Options Model (Private Company).

121. Probability of Default—Merton Market Options Model (Industry Comparable).

122. Project Management—Cost Estimation Model.

123. Project Management—Critical Path Analysis (CPM PERT GANTT).

124. Project Management—Project Timing.

125. Real Estate—Commercial Real Estate ROI.

126. Risk Analysis—Integrated Risk Analysis.

127. Risk Analysis—Interest Rate Risk.

128. Risk Analysis—Portfolio Risk Return Profiles.

129. Risk Hedging—Delta-Gamma Hedging.

130. Risk Hedging—Delta Hedging.

131. Risk Hedging—Effects of Fixed versus Floating Rates.

132. Risk Hedging—Foreign Exchange Cash Flow Model.

133. Risk Hedging—Hedging Foreign Exchange Exposure.

134. Sensitivity—Greeks.

135. Sensitivity—Tornado and Sensitivity Charts Linear.

136. Sensitivity—Tornado and Sensitivity Nonlinear.

137. Simulation—Basic Simulation Model.

138. Simulation—Best Surgical Team.

139. Simulation—Correlated Simulation.

140. Simulation—Correlation Effects on Risk.

141. Simulation—Data Fitting.

142. Simulation—Debt Repayment and Amortization.

143. Simulation—Demand Curve and Elasticity Estimation.

144. Simulation—Discounted Cash Flow, Return on Investment, and Volatility Estimates.

145. Simulation—Infectious Diseases.

146. Simulation—Recruitment Budget (Negative Binomial and Multidimensional Simulation).

147. Simulation—Retirement Funding with VBA Macros.

148. Simulation—Roulette Wheel.

149. Simulation—Time Value of Money.

150. Six Sigma—Obtaining Statistical Probabilities, Basic Hypothesis Tests, Confidence Intervals, and Bootstrapping Statistics.

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).

152. Six Sigma—Sample Size Determination and Design of Experiments.

153. Six Sigma—Statistical and Unit Capability Measures, Specification Levels, and Control Charts.

154. Valuation—Buy versus Lease.

155. Valuation—Banking: Classified Loan Borrowing Base.

156. Valuation—Banking: Break-Even Inventory with Seasonal Lending Trial Balance Analysis.

157. Valuation—Banking: Firm in Financial Distress.

158. Valuation—Banking: Pricing Loan Fees Model.

159. Valuation—Valuation Model.

160. Value at Risk—Optimized and Simulated Portfolio VaR.

161. Value at Risk—Options Delta Portfolio VaR.

162. Value at Risk—Portfolio Operational and Credit Risk VaR Capital Adequacy.

163. Value at Risk—Right-Tail Capital Requirements.

164. Value at Risk—Static Covariance Method.

165. Volatility—Implied Volatility.

166. Volatility—Volatility Computations (Log Returns, Log Assets, Implied Volatility, Management Assumptions, EWMA, GARCH).

167. Yield Curve—CIR Model.

168. Yield Curve—Curve Interpolation BIM Model.

169. Yield Curve—Curve Interpolation NS Model.

170. Yield Curve—Forward Rates from Spot Rates.

171. Yield Curve—Term Structure of Volatility.

172. Yield Curve—U.S. Treasury Risk-Free Rates and Cubic Spline Curves.

173. Yield Curve—Vasicek Model.

Part 2: Real Options SLS Applications.

174. Introduction to the SLS Software.

175. Employee Stock Options—Simple American Call Option.

176. Employee Stock Options—Simple Bermudan Call Option with Vesting.

177. Employee Stock Options—Simple European Call Option.

178. Employee Stock Options—Suboptimal Exercise.

179. Employee Stock Options—Vesting, Blackout, Suboptimal, Forfeiture.

180. Exotic Options—American and European Lower Barrier Options.

181. Exotic Options—American and European Upper Barrier Options.

182. Exotic Options—American and European Double Barrier Options and Exotic Barriers.

183. Exotic Options—Basic American, European, and Bermudan Call Options.

184. Exotic Options—Basic American, European, and Bermudan Put Options.

185. Real Options—American, European, Bermudan, and Customized Abandonment Options.

186. Real Options—American, European, Bermudan, and Customized Contraction Options.

187. Real Options—American, European, Bermudan, and Customized Expansion Options.

188. Real Options—Contraction, Expansion, and Abandonment Options.

189. Real Options—Dual Variable Rainbow Option Using Pentanomial Lattices.

190. Real Options—Exotic Chooser Options.

191. Real Options—Exotic Complex Floating American and European Chooser.

192. Real Options—Jump-Diffusion Option Using Quadranomial Lattices.

193. Real Options—Mean-Reverting Calls and Puts Using Trinomial Lattices.

194. Real Options—Multiple Assets Competing Options.

195. Real Options—Path-Dependent, Path-Independent, Mutually Exclusive, Non–Mutually Exclusive, and Complex Combinatorial Nested Options.

196. Real Options—Sequential Compound Options.

197. Real Options—Simultaneous Compound Options.

198. Real Options—Simple Calls and Puts Using Trinomial Lattices.

Part 3: Real Options Strategic Case Studies—Framing the Options.

199. Real Options Strategic Cases—High-Tech Manufacturing: Build or Buy Decision with Real Options.

200. Real Options Strategic Cases—Oil and Gas: Farm-Outs, Options to Defer, and Value of Information.

201. Real Options Strategic Cases—Pharmaceutical Development: Value of Perfect Information and Optimal Trigger Values.

202. Real Options Strategic Cases—Option to Switch Inputs.

203. Valuation—Convertible Warrants with a Vesting Period and Put Protection.

APPENDIX A: List of Models.

APPENDIX B: List of Functions.

APPENDIX C: Understanding and Choosing the Right Probability Distributions.

APPENDIX D: Financial Statement Analysis.

APPENDIX E: Exotic Options Formulae.

APPENDIX F: Measures of Risk.

APPENDIX G: Mathematical Structures of Stochastic Processes.

Glossary of Input Variables and Parameters in the Modeling Toolkit Software.

About the DVD.

About the Author.

Index.

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Johnathan Mun is currently the founder and CEO of Real Options Valuation, Inc., as well as the creator of the Real Options Super Lattice Solver software for real option valuation and Risk Simulator Monte Carlo simulation software. Prior to starting his own firm, he was the vice president of analytics at Decisioneering, Inc. Mun is also a Full Professor at the U.S. Naval Postgraduate School (California) and the University of Applied Sciences (Switzerland and Germany). He has authored numerous books, including Real Options Analysis, Real Options Analysis Course, Modeling Risk (previously titled Applied Risk Analysis before revision and updates), and Valuing Employee Stock Options (all published by Wiley). Mun has also taught and consulted for more than 300 corporations in twenty countries worldwide on risk analysis and real options, and is considered a leading authority on real options and risk analysis.
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