Professional Financial Computing Using Excel and VBA

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 Spline 67

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 Portfolios 152

10.3. Historical Simulation for Multiple-Asset Portfolios 160

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 Model 210

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