Misha Sulpovar-Many financial models which use advanced modeling and analytical techniques are spreadsheet based

1. Misha Sulpovar

2.  Financial engineering is a multidisciplinary field involving the
application of quantitative methods to finance.
 Used for quantitative analyst positions in securities, banking,
financial management and consulting industries
 Optimization models can help a manager maximize/minimize
objectives or just quickly produce feasible solutions for highly
constrained problems

3.  GE Capital, a $70 billion subsidiary of GE financial
services business, developed an optimization
model to allocate and schedule the rental and
debt payments of a leveraged lease which allowed
analysts to target profitability as well as optimize
NPV of rental payments.
Grantham, May, Van Otterloo & Co., an investmentGrantham, May, Van Otterloo & Co., an investment
management firm with $26 billion assets, developed amanagement firm with $26 billion assets, developed a
mixed integer programming model to designmixed integer programming model to design
portfolios that achieve investment objectives whileportfolios that achieve investment objectives while
minimizing the number of stocks and transactionsminimizing the number of stocks and transactions
requiredrequired..
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Misha Sulpovar

4.  TFM Investment Group, which was designated as a
market maker in exchange traded funds (ETFs) in 2001,
used integer programming to minimize the cost of
producing creation units while remaining hedged. A
second optimization technique was used to minimize
the beta-dollar difference between the ETF and the
portfolio of constituent stocks which minimized the
tracking error between the current position in the
basket of stocks and the number of short ETFs in TFM’s
portfolio.
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Misha Sulpovar

5. W o r k in g C a p it a l M g m t
C a p it a l In v e s t m e n t P la n n in g
S h o r t T e r m F in a n c ia l P la n n in g
F in a n c ia l M a n a g e m e n t
I d e n t if y in g A r b it r a g e O p p o r t u n it ie s
S e c u r it y D e s ig n
F in a n c ia l M a r k e ts P o r t fo lio M a n a g e m e n t
O p t i m i z a t i o n & F i n a n c i a l E n g i n e e r i n g

6. C a s h B u d g e t in g
M u lt ip e r io d L P M o d e ls
W o r k in g C a p it a l M g m t
C a p it a l B u d g e t in g
I P M o d e ls
C a p it a l In v e s t m e n t P la n n in g
M u lt ip le O b je c t iv e s
G o a l P r o g r a m m in g
S h o r t T e r m F in a n c ia l P la n n in g
F in a n c ia l M a n a g e m e n t
F o r e ig n E x c h a n g e M a r k e ts
I d e n t if y in g A r b it r a g e O p p o r t u n it ie s
M u n ic ip a l B o n d U n d e r w r it in g
L e v e r a g e d L e a s e s
S e c u r it y D e s ig n
F in a n c ia l M a r k e ts
P o r t fo lio S t r u c t u r in g
E f f ic ie n t F r o n t ie rs
N L P M o d e ls
D a t a E n v e lo p m e n t A n a ly s is
E t h ic a l M u t u a l F u n d s
P o r t fo lio M a n a g e m e n t
O p t i m i z a t i o n & F i n a n c i a l E n g i n e e r i n g

7.  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)
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Misha Sulpovar

8. ModelModel ResultsResults
ManagementManagement
SituationSituation
DecisionsDecisions
AnalysisAnalysis
IntuitionIntuition
InterpretationInterpretation
AbstractionAbstraction
Symbolic WorldSymbolic World
Real WorldReal World
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Misha Sulpovar

9.  Force you to be explicit about your objectives
Force you to identify the types of decisions that influence thoseForce you to identify the types of decisions that influence those
objectivesobjectives
Force you to think carefully about variables to include and theirForce you to think carefully about variables to include and their
definitions in terms that are quantifiabledefinitions in terms that are quantifiable
Force you to consider what data are pertinent for quantificationForce you to consider what data are pertinent for quantification
Allow communication of your ideas and understanding toAllow communication of your ideas and understanding to
facilitate teamworkfacilitate teamwork
Force you to recognize constraints on values that variables mayForce you to recognize constraints on values that variables may
assumeassume
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Misha Sulpovar

10.  Inputs
• Decisions which are controllable
• Parameters which are uncontrollable
 Outputs
• Performance variables, or objective functions, that
measure the degree of goal attainment
• Consequence variables that display other
consequences so results can be better interpreted
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Misha Sulpovar

11.  In deterministic models, all of the relevant data
(parameter values) are assumed to be known
with certainty.
 In probabilistic (stochastic) models, some
parameter input is not known with certainty,
thus causing uncertainty in the other variables.
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Misha Sulpovar

12.  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)
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Misha Sulpovar

13.  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
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Misha Sulpovar

14.  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
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Misha Sulpovar

15.  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
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Misha Sulpovar

16.  Construct decision-support spreadsheet
models to analyze various complex,
multi-criteria financial applications.
 Apply advanced analytical skills in
modeling and decision-making with an
emphasis on optimization techniques.
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Misha Sulpovar

17.  Critically analyze and integrate
information provided by the use of
optimization techniques into the
decision-making process.
 Implement appropriate organizational
controls and spreadsheet design skills to
mitigate the risks of a misstatement in a
financial spreadsheet.
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Misha Sulpovar