1. Guide To Excel For Finance: Introduction
  2. Guide To Excel For Finance: Linking Yahoo! Finance and Other Outside Financial Data To Excel
  3. Guide To Excel For Finance: PV And FV Functions
  4. Guide to Excel for Finance: Annuities
  5. Guide To Excel For Finance: Valuation Methods
  6. Guide To Excel For Finance: Goal Seek
  7. Guide To Excel For Finance: HLookup And VLookup
  8. Guide To Excel For Finance: Ratios
  9. Guide To Excel For Finance: Technical Indicators
  10. Guide To Excel For Finance: Advanced Calculations
  11. 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. 

 


Guide To Excel For Finance: Conclusion
Related Articles
  1. Investing

    Using Monte Carlo Simulations in Financial Plans

    A Monte Carlo forecast can be a great tool that helps financial planners guide clients.
  2. Investing

    How to use Monte Carlo simulation with GBM

    Learn how to estimate risk with the use of a Monte Carlo simulation to predict future events through a series of random trials.
  3. 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.
  4. Personal Finance

    Stock Market Simulators: Play Your Way To Profits

    Online stock simulators make learning about stocks as fun and easy as playing a game.
  5. Small Business

    Disadvantages Of Stock Simulators

    Stock simulators enable one to practice trading, but they have some disadvantages that you should be aware of, before transitioning to actual trading.
  6. 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".
  7. Investing

    Scenario Analysis Provides Glimpse Of Portfolio Potential

    This statistical method estimates how far a stock might fall in a worst-case scenario.
  8. Trading

    Improve Your Investing With Excel

    Excel is a useful tool to assist with investment organization and evaluation. Find out how to use it.
Frequently Asked Questions
  1. How a bond's face value differs from its price

    Discover how bonds are traded as investment securities and understand the various terms used in bond trading, including par ...
  2. What does CHIPS UID mean?

    Learn what CHIPS UID stands for and how it facilitates the transfer of funds as the back-end of the ACH network for both ...
  3. What does the de Minimis clause for investment advisers mean?

    Learn the answer to what the de Minimis clause for investment advisers means.
  4. How does Twitter make money?

    Learn how Twitter earns revenue, including how the social media company uses three targeted advertising streams, data farming ...
Trading Center