Financial modeling Essay Example | Topics and Well Written Essays - 1750 words

Financial exemplificationing - Essay Example exclusively this is not to say that financial nonplusing cannot be performed manually.There are unlike financial models that a alliance can use in evaluating its investment projects. The only challenge for the follow is to identify the model that go forward provide the most accu reckon information that can help the union make the right decision.With the advent of technology and computer, many models nowadays are calculated and evaluated using computer software which makes the whole touch easy and faster. It is a fact that in a competitive world, companies should be able to make fast, apropos and accurate investment decisions. But this is not to say that financial modeling cannot be performed manually.There are various financial models that a company can use in evaluating its investment projects. The only challenge for the company is to identify the model that will provide the most accurate information that can help the company m ake the right decision.Some of there models include Value- at- risk models, Interest rate models, lawfulness pricing models, addition allocation models, Trading models, Investment portfolio models that can be used on equity or derivatives, personal credit line simulation models that include monte Carlo simulation and binary free and genetic algorithms used in optimisation decisions.This is a model of calculating the probability of a collection of investment securities generating returns more than the anticipated. It is a model of analyzing past merchandise murder, auspices correlation and the surety lawsuits.A basic value-at-risk model involves all types of market uncertainties e.g. enkindle, stock, goods and currency risks. It enables the determination of an estimate on the value of portfolio risk (maximum loss) based on the past performance of the portfolio at a given rate of certainty.The various models under the value-at-risk include the variance-covariance method, his torical simulation and Monte Carlo simulation models.Variance-covariance It uses past values of security movements and relationship to determine the estimate of the future loses that could occur. Security movements and security relationship risk is calculated for a given period of time.Historical simulation modelsIt gene evaluate a vision of results of the security value. It uses security risk and their associated probabilities to generate these results which are used to estimate the value of VaR.Interest rate modelsSome of the most commonly used interest rate financial models are the Black-Derman-Toy (BDT) model, Black -Karainsky (BK) model, Heath- Jarrow-Morton (HJM) model and the White-Hull model,Black-Derman-Toy Interest Rate manikinIt is mainly used for determining the value of derivatives by considering a prelude zero rate term structure and the movement of the yield by constructing a tree explaining the interest rates. This model can also be a single-factor or multi-factor .The Heath-Jarrow-Morton modelIt uses statistical data and processes to amount the value of the derivatives by considering preliminary zero rate term structure and the up and down movement of future rates.Hull-white modelIt is a single factor that uses the preliminary term structure of interest rates with the up and down movement term structure to construct a trinomial free of short rates.Equity pricing modelsOne of the widely used equity pricing model is the Capital Assets Pricing Model developed by William Sharpe and John Litner. It works on the premise that the return of a given security is affected by the risk called systematic. This risk is measured using beta () and it cannot be diversified away by holding a portfolio of securities. This model evolved from the portfolio theory which did not