Financial Simulation Modeling in Excel

Preface

Regardless of where I work, simulation has crept into my financial career. After nearly a decade of working with it in many capacities I've found it to be a mixed blessing. In many investment companies when the term simulation is simply brought up there are a variety of reactions. The two most visible camps of thought seem to be the utilizers, who think the results of a simulation have value and the skeptics, who think simulation overcomplicates analyses.

The utilizers believe that when a concept or instrument is researched correctly, information parsed and calculated properly, and a simulation constructed in a statistically correct manner, the results can be used to make decisions. I tend to fall into this camp, with a few caveats I will mention later, because I have seen its utility in a variety of settings. Infrastructure deals that I saw early in my career that involved vehicular traffic, trade, or passenger flows, made more sense through simulation results given the wide variety of scenarios that could play out over time. A commodity company investment that I worked on at Citigroup involving soybeans seemed more appropriate after seeing the historic volatility of soybean prices and how their expected evolution might affect our exposure. In my structured finance career, the value of simulation on a very granular level for distressed mortgage-backed securities provided insight into obligor delinquency, default, and eventually expected security value loss. More recently, ...