Financial Simulation Modeling in Excel

FROM ASSETS TO POOLS

In this chapter we covered a number of methods to estimate credit risk from both information about a company's balance sheet and from market data. The models that we have built are complex, but it is important to remember that they are simple representations of much more complex entities. While these will help us to see which companies are likely to be good credits and which companies are riskier, qualitative measures that may not show up in historical numbers, such as changes in management or the development of disruptive technologies, can have major implications on the survival of a company.

It is important to remember this as we move to Chapter 6, where we will take a step further away from the fundamental credit of each company to look at simulating pools of assets. Here we will be taking the outputs from this chapter (the probability of a company defaulting or the probability that asset values drop below a certain threshold) and using it to evaluate portfolios of hundreds or even thousands of investments.