Professional Financial Computing Using Excel and VBA

Preface ix
CHAPTER 1 Financial Engineering and Computing 1
1.1 Financial Engineering and Spreadsheet Modeling 1
1.2 Lehman Brothers' Products for Retail Investors 3
1.3 Risk Management and Basel II 4
1.4 About the Book 4
1.5. Chapter Highlights 6
1.6 Other Remarks 7
CHAPTER 2 The GARCH(1,1) Model 9
2.1. The Model 9
2.2. Excel Implementation 10
2.3. Excel Plus VBA Implementation 15
CHAPTER 3 Finite Difference Methods 21
3.1. Difference Equations 21
3.2. Excel Implementation 24
3.3. VBA Implementation 28
3.4. Crank-Nicholson Scheme 33
CHAPTER 4 Portfolio Mean-Variance Optimization 37
4.1. Portfolio Selection 37
4.2. Excel Implementation 42
4.3. Excel Plus VBA Implementation 48
CHAPTER 5 Newton-Raphson Method 59
5.1. Newton-Raphson Method for Systems of Equations 59
5.2. VBA Routine 61
CHAPTER 6 Yield Curve Construction Using Cubic Spline67
6.1. Cubic Spline Interpolation 67
6.2. Yield Curve Construction 75
6.3. Excel Plus VBA Implementation 77
CHAPTER 7 Binomial Option Pricing Model 85
7.1. Risk-Neutral Option Pricing
and the Binomial Tree 85
7.2. VBA Implementation 89
CHAPTER 8 The Black-Derman-Toy Model 95
8.1. The Term Structure Model and
the Black-Derman-Toy Tree 95
8.2. Excel Plus VBA Implementation 98
CHAPTER 9 Monte Carlo Option Pricing 109
9.1. TheMonte Carlo Method 109
9.2. Risk-Neutral Valuation 112
9.3. VBA Implementation 114
9.4. Exotic Options 124
9.5. American Options 132
CHAPTER 10 Portfolio Value-at-Risk 143
10.1. Portfolio Risk Simulation 143
10.2. Monte Carlo Simulation for Multiple-Asset Portfolios152
10.3. Historical Simulation for Multiple-Asset Portfolios160
10.4. VBA Implementation of Portfolio Risk Simulation 164
10.5. Drill Down of Portfolio Risk 180
CHAPTER 11 The Hull-White Model 189
11.1. Hull-White Trinomial Tree 189
11.2. Excel Plus VBA Implementation 196
11.3. The General Hull-White Model 203
11.4. Implementation of the General Hull-White Model210
CHAPTER 12 CreditMetrics Model 221
12.1. The CreditMetrics Model 221
12.2. Individual (Segregate) Asset Valuation Framework 221
12.3 Monte Carlo Simulation in Detail 225
12.4. Excel and VBA Implementation 227
CHAPTER 13 KMV-Merton Model 243
13.1. KMV-Merton Model of Credit Risk 243
13.2. Excel and VBA Implementation 248
APPENDIX A VBA Programming 255
A.1 Introduction 255
A.2 A Brief History of VBA 255
A.3 Essential Excel Elements for VBA 256
A.3.1 Excel Cell Reference 257
A.3.2 Excel Defined Names 261
A.3.3 Excel Worksheet Functions 264
A.4 The VBA Development Environment (VBE) 266
A.4.1 The Developer Tab in the Ribbon 266
A.4.2 The Windows of VBE 268
A.4.3 The Project Explorer 272
A.4.4 The VBA Project Structure 273
A.4.5 The Procedure to Create a VBA Subroutine 275
A.4.6 The Procedure to Create a VBA Function 278
A.5 Basic VBA Programming Concepts 280
A.5.1 Variables and Data Types 285
A.5.2 Declaration and Assignment Statements 287
A.5.3 Flow Control Statements 293
A.6 VBA Arrays 300
A.7 Using Worksheet Matrix Functions in VBA 304
A.8 Summary 311
APPENDIX B The Excel Object Model 315
APPENDIX C VBA Debugging Tools 321
APPENDIX D Summary of VBA Operators 327
APPENDIX E Summary of VBA Functions 331
APPENDIX F Summary of VBA Statements 333
APPENDIX G Excel Array Formula 341
Index 349