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

    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. Investing

    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. 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

    Understanding the Black-Scholes Model

    The Black-Scholes model is a mathematical model of a financial market. From it, the Black-Scholes formula was derived. The introduction of the formula in 1973 by three economists led to rapid ...
  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. Investing

    Guide To Excel For Finance

    Formulas, functions and features you need to know when using Excel for financial analysis.
  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

    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".
  9. Financial Advisor

    5 Reasons Why Your Software Won't Meet Fiduciary Standards

    Many advisors are finding their technology doesn't meet their needs to uphold a fiduciary standard.
Frequently Asked Questions
  1. Do interest rates increase during a recession?

    Learn why interest rates do not rise in a recession; in fact, the opposite happens. Identify the factors that reduce interest ...
  2. What is the difference between deflation and disinflation?

    Learn what deflation and disinflation are, how supply and demand affect price levels, and the difference between deflation ...
  3. What rights do all common shareholders have?

    Learn what rights all common shareholders have, and understand the remedies that can be taken if those rights are violated ...
  4. 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 ...
Trading Center