1. Guide To Excel For Finance: Introduction
  2. Guide To Excel For Finance: Goal Seek
  3. Guide To Excel For Finance: PV And FV Functions
  4. Guide To Excel For Finance: HLookup And VLookup
  5. Guide To Excel For Finance: Linking Yahoo! Finance and Other Outside Financial Data To Excel
  6. Guide To Excel For Finance: Ratios
  7. Guide To Excel For Finance: Technical Indicators
  8. Guide To Excel For Finance: Valuation Methods
  9. Guide To Excel For Finance: Advanced Calculations
  10. Guide To Excel For Finance: Conclusion

Monte Carlo Simulation
In its most basic form, the Monte Carlo simulation seeks to simulate real-world outcomes by showing a range of outcomes for a given variable set. For example, in the casino game roulette, Monte Carlo could simulate where the roulette ball lands for 10 consecutive rounds.

Excel's "RAND" function can generate random numbers in a given sample set. By simply setting the formula equal to RAND, Excel will generate a random number between 0 and 1. To detail the range of possible outcomes, Microsoft states that around 25% of the time, a number less than or equal to 0.25 should occur, and around 20% of the time the number will be at least 0.90, which is logical and intuitive, given the outcomes are restricted to such a tight range.

Excel offers a number of other ways to simulate random variable outcomes. For instance, the "NORMINV" function returns the inverse of the normal distribution for a specified mean and standard deviation.

Black-Scholes Formula
The valuation of stock options can be incredibly complex and math-intensive. Excel offers a number of ways to price stock options, including the more plain vanilla puts and calls. The Black-Scholes formula is the most widely adopted measure for valuing an option. Its inputs are as follows:

S=Today's stock price
t=Duration of the option (in years)
X=Exercise price
r=Annual risk-free rate (This rate is assumed to be continuously compounded.)
σ=Annual volatility of stock
y=Percentage of stock value paid annually in dividends

Excel doesn't have an actual formula employing Black-Scholes, but there are add-ins, as well as additional outside files that can be downloaded to help the user calculate the value of a put or call option.

Time Value of Money
The time value of money generally relates to the concepts of present value and future value, as explained previously in the PV Functions and FV Functions. The basic forms of the time value of money, which consists of multiplying an initial present value by an interest rate to get to a future value, can easily be calculated via a single cell calculation in Excel.

The more complicated theories, including DCF, DDM and RIM, require more sophisticated modeling techniques in Excel and have also been touched upon in previous pages.

Guide To Excel For Finance: Conclusion

Related Articles
  1. Investing

    Explaining the Monte Carlo Simulation

    Monte Carlo simulation is an analysis done by running a number of different variables through a model in order to determine the different outcomes.
  2. Retirement

    Planning Your Retirement Using The Monte Carlo Simulation

    You can use the Monte Carlo Simulation to improve your retirement planning.
  3. Investing

    Create a Monte Carlo Simulation Using Excel

    How to apply the Monte Carlo Simulation principles to a game of dice using Microsoft Excel.
  4. Investing

    Why Your Investment Growth Calculator May Be Wrong

    Many simple investment growth calculators fall short, so here's one you should use instead.
  5. Trading

    How To Convert Value At Risk To Different Time Periods

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  6. Trading

    Stimulate Your Skills With Simulated Trading

    Think you can beat the Street? We'll show you how to test your abilities without losing your shirt.
  7. Investing

    An Introduction To Value at Risk (VAR)

    Volatility is not the only way to measure risk. Learn about the "new science of risk management".
  8. Insights

    Simulating Stock Prices Using Excel

    We will use the average of the change in log prices, the volatility, the normal distribution and Excel to formulate the future prices of an asset.
  9. Trading

    Introduction To Counterparty Risk

    Unlike a funded loan, the exposure from a credit derivative is complicated. Find out everything you need to know about counterparty risk.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center