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John Charnes, PhD, MBA, is President of the Risk Analytics and Predictive Intelligence Division (RAPID) of Syntelli Solutions Inc. Prior to this, he was finance department chair at the University of Kansas and senior vice president of global portfolio strategies at Bank of America. Charnes created the Crystal Ball Training CD, a multimedia course on the basic elements of stochastic modeling with Crystal Ball, acquired by Oracle. His specialty is the application of computer simulation and statistical methods for identifying and solving business problems, including the use of simulation for option pricing and hedging with derivatives to comply with Financial Accounting Standard (FAS) 133.
Preface | p. xi |
Acknowledgments | p. xvii |
About the Author | p. xix |
Introduction | p. 1 |
Financial Modeling | p. 2 |
Risk Analysis | p. 2 |
Monte Carlo Simulation | p. 4 |
Risk Management | p. 8 |
Benefits and Limitations of Using Crystal Ball | p. 9 |
Analyzing Crystal Ball Forecasts | p. 11 |
Simulating a 50-50 Portfolio | p. 11 |
Varying the Allocations | p. 22 |
Presenting the Results | p. 27 |
Building A Crystal Ball Model | p. 29 |
Simulation Modeling Process | p. 29 |
Denning Crystal Ball Assumptions and Forecasts | p. 30 |
Running Crystal Ball | p. 33 |
Sources of Error | p. 34 |
Controlling Model Error | p. 36 |
Selecting Crystal Ball Assumptions | p. 37 |
Crystal Ball's Basic Distributions | p. 37 |
Using Historical Data to Choose Distributions | p. 55 |
Specifying Correlations | p. 64 |
Using Decision Variables | p. 79 |
Denning Decision Variables | p. 79 |
Decision Table with One Decision Variable | p. 81 |
Decision Table with Two Decision Variables | p. 87 |
Using OptQuest | p. 98 |
Selecting Run Preferences | p. 105 |
Trials | p. 105 |
Sampling | p. 109 |
Speed | p. 111 |
Options | p. 113 |
Statistics | p. 115 |
Net Present Value and Internal Rate of Return | p. 117 |
Deterministic NPV and IRR | p. 117 |
Simulating NPV and IRR | p. 119 |
Capital Budgeting | p. 123 |
Customer Net Present Value | p. 133 |
Modeling Financial Statements | p. 137 |
Deterministic Model | p. 137 |
Tornado Chart and Sensitivity Analysis | p. 138 |
Crystal Ball Sensitivity Chart | p. 139 |
Conclusion | p. 143 |
Portfolio Models | p. 145 |
Single-period Crystal Ball Model | p. 145 |
Single-period Analytical Solution | p. 148 |
Multi-period Crystal Ball Model | p. 149 |
Value at Risk | p. 155 |
VaR | p. 155 |
Shortcomings of VaR | p. 157 |
Conditional Value at Risk | p. 157 |
Simulating Financial Time Series | p. 163 |
White Noise | p. 163 |
Random Walk | p. 165 |
Autocorrelation | p. 166 |
Additive Random Walk with Drift | p. 170 |
Multiplicative Random Walk Model | p. 173 |
Geometric Brownian Motion Model | p. 176 |
Mean-reverting Model | p. 180 |
Financial Options | p. 187 |
Types of Options | p. 187 |
Risk-neutral Pricing and the Black-Scholes Model | p. 188 |
Portfolio Insurance | p. 192 |
American Option Pricing | p. 194 |
Exotic Option Pricing | p. 197 |
Bull Spread | p. 201 |
Principal-protected Instrument | p. 201 |
Real Options | p. 205 |
Financial Options and Real Options | p. 205 |
Applications of Real Options Analysis | p. 206 |
Black-Scholes Real Options Insights | p. 209 |
Real Options Valuation Tool | p. 211 |
Credit Risk | p. 221 |
Expected Loss | p. 221 |
Credit Risk Simulation Model | p. 223 |
Conditional Value at Risk | p. 225 |
Using CVaR to Manage Credit Risk | p. 227 |
Construction Project Management | p. 229 |
Project Description | p. 229 |
Choosing Construction Methods | p. 231 |
Risk Analysis | p. 231 |
Stochastic Optimization | p. 234 |
Oil and Gas Exploration | p. 235 |
Well Properties | p. 235 |
Statistical Models | p. 236 |
Conclusion | p. 239 |
Crystal Ball's Probability Distributions | p. 241 |
Bernoulli | p. 241 |
Beta | p. 243 |
Beta PERT | p. 244 |
Binomial | p. 246 |
Custom | p. 247 |
Discrete Uniform | p. 251 |
Exponential | p. 252 |
Gamma | p. 254 |
Geometric | p. 255 |
Hypergeometric | p. 257 |
Logistic | p. 259 |
Lognormal | p. 260 |
Maximum Extreme | p. 262 |
Minimum Extreme | p. 263 |
Negative Binomial | p. 264 |
Normal | p. 266 |
Pareto | p. 267 |
Poisson | p. 269 |
Student's t | p. 270 |
Triangular | p. 272 |
Uniform | p. 273 |
Weibull | p. 275 |
Yes-No | p. 276 |
Generating Assumption Values | p. 279 |
Generating Random Numbers | p. 279 |
Generating Random Variates | p. 282 |
Latin Hypercube Sampling | p. 284 |
Variance Reduction Techniques | p. 287 |
Using Crystal Ball to Value an Asian Option | p. 288 |
Antithetic Variates | p. 289 |
Control Variates | p. 289 |
Comparison | p. 290 |
Conclusion | p. 292 |
About the Download | p. 293 |
Glossary | p. 297 |
References | p. 301 |
Index | p. 311 |
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