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Financial Modelling

Module description

Summary:

This module equips you with the knowledge and tools to implement financial models using Excel and Visual Basic for Applications (VBA). The module covers a range of topics in finance drawn from corporate finance, portfolio theory, fixed income analysis, risk management and international finance. The emphasis of the module is on the practical application of finance theory, with lectures on each topic followed by in-depth practical classes, in which you will work through real world problems using Excel and VBA.

Additional information:

Employability

This is an applied module that covers the implementation of quantitative financial models that are widely used in financial institutions such as investment banks, mutual funds and hedge funds, and in non-financial corporations.

Internationalisation

The content of this module is relevant to the finance industry in an international setting, with examples drawn from a number of global financial markets.

Sustainability

The sustainable operation of financial markets relies on the fact that security prices reflect the fair value of the future cash flows that they promise to pay. The fair valuation of security prices is maintained by the actions of investors, who exploit deviations from fair value through the implementation of financial models such as those covered in this module.

Research in Teaching

Some of the material covered in the module draws on research in the area of applied finance undertaken by the module convener, and either published in academic journals or used as a basis for commercial consultancy. Where appropriate, references to this research will be provided.

Module aims - intentions of the module

The aim of this module is to equip students with the knowledge and tools to implement financial models using Excel and VBA. The course introduces students to the general principles of building financial models, as well as a number of specific financial modelling tools, including matrix calculations, optimisation, regression analysis, out-of-sample forecasting and simulation. These methods are applied to a range of practical problems in finance, including passive and active portfolio management, risk management and currency valuation. The emphasis of the course is on practical application of the theory, with lectures on each topic followed by in-depth practical classes, in which students work through real world problems using Excel and VBA.

Intended Learning Outcomes (ILOs)

ILO: Module-specific skills

On successfully completing the module you will be able to...

• 1. explain the objectives of financial modelling and the characteristics of financial data
• 2. download financial data from the internet for a range of securities, including stocks, bonds, derivatives and currencies
• 3. undertake a range of financial and statistical calculations in Excel
• 4. estimate the cost of capital for a company
• 5. estimate the variance-covariance matrix of returns using several approaches
• 6. estimate the optimal passive portfolio of securities, with and without investment constraints
• 7. derive the optimal actively managed portfolio of securities
• 8. evaluate the risk of an investment portfolio
• 9. forecast the volatility of financial assets
• 10. estimate a model of the term structure of interest rates

ILO: Discipline-specific skills

On successfully completing the module you will be able to...

• 11. evaluate the characteristics of financial data and their statistical properties
• 12. explain the principles of passive and active portfolio management
• 13. estimate corporate and Treasury bond yields and yield curves
• 14. use simulation to model the unknown distribution of financial security returns
• 15. evaluate the characteristics and dynamic properties of the volatility of financial assets

ILO: Personal and key skills

On successfully completing the module you will be able to...

• 16. solve applied problems using Excel
• 17. download and manipulate complex data
• 18. plan and undertake independent research
• 19. present your research in a professional manner
• 20. work effectively in teams

Syllabus plan

• Introduction
• Portfolio Optimisation
• Portfolio Management
• Risk Management
• Volatility Forecasting
• Modelling the Yield Curve

Learning activities and teaching methods (given in hours of study time)

Details of learning activities and teaching methods

Formative assessment

Summative assessment (% of credit)

Details of summative assessment

Details of re-assessment (where required by referral or deferral)

Indicative learning resources - Basic reading

Benninga, S. (2014) Financial Modeling, 4th edition, Massachusetts: MIT Press.

Indicative learning resources - Web based and electronic resources

To be advised during the course.

Indicative learning resources - Other resources

To be advised during the course.

Key words search

Financial modelling; Applied finance; Excel; VBA