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MBAD/F 619: Risk Analysis and Financial Modeling. Instructor: Linda Leon Summer 2010 /. Overview of Financial Modeling. Addresses problems and decisions related to a firm’s assets and liabilities

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mbad f 619 risk analysis and financial modeling

MBAD/F 619: Risk Analysis and Financial Modeling

Instructor: Linda Leon

Summer 2010

overview of financial modeling
Overview of Financial Modeling
  • Addresses problems and decisions related to a firm’s assets and liabilities
    • Investment decisions identify which assets should be purchased
    • Financing decisions determine the sources of funds necessary to purchase the assets
  • Sets the objectives for future investment and financing decisions, judges the effects of various decisions and guides the decisions about which investment or financing alternatives should be undertaken
financial modeling an overview of relationships between inputs and outputs
Financial Modeling: An Overview of Relationships Between Inputs and Outputs

Special Analysis

Fund Flow


Pro forma Statements







Financial Model

(computer program)

Operating History and Future Assumptions



Manufacturing or

Service Inputs



two general approaches to financial modeling
Two General Approaches to Financial Modeling
  • Simulation
    • Process of imitating the firm so that the possible consequences of alternative decisions and strategies can be analyzed prior to implementation (MBAD/F 619)
  • Optimization
    • Identifies which decision alternative leads to a desired objective given a specified set of fixed assumptions (MBAD/F 617)
overview of risk
Overview of Risk
  • What is your definition of risk?
  • Types of financial risk
    • Capital risk
    • Liquidity risk
    • Systematic risk
    • Systemic risk
risk management applications
Risk Management Applications
  • Investment Decisions
    • Capital Budgeting
    • Mergers & Acquisitions
    • Real Estate
    • Portfolio Strategies
  • Financing Decisions
    • Cash budgeting
    • Working Capital Management
    • Debt Financing
    • Options
financial modeling
Financial Modeling
  • Many financial models which use advanced modeling and analytical techniques are spreadsheet based
  • There is a market demand for more sophisticated models and analysis by financial end-users
  • Most end-users prefer to develop their own models (cost,flexibility)
advantages of end user modeling
Advantages of End-User Modeling
  • End-users get closer to the raw data and the assumptions being made
  • End-users can customize the models to generate information that fits their needs
  • End-users can see results easily and immediately, which enhances strategy generation and encourages risk analysis
disadvantages of end user modeling
Disadvantages of End-User Modeling
  • Incorrect information is generated by inappropriate or inaccurate models (20 to 40% contain significant errors)
  • End-users are overconfident about the quality of their own spreadsheets
  • Poorly designed models can discourage strategy generation and risk analysis
  • End-users may not always employ the most productive methods for generating insights or may misinterpret the generated information
recent spreadsheet research shows
Recent spreadsheet research shows…
  • End users typically do not plan their spreadsheets
  • End users rarely spend time debugging their models
  • End users almost never let another person review their spreadsheets
  • Many end users do not consistently use tools that can make modeling productive and insightful