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Financial Modeling is now the standard text for explaining the implementation of financial models in Excel. This long-awaited fourth edition maintains the “cookbook” features and Excel dependence that have made the previous editions so popular. As in previous editions, basic and advanced models in the areas of corporate finance, portfolio management, options, and bonds are explained with detailed Excel spreadsheets. Sections on technical aspects of Excel and on the use of Visual Basic for Applications (VBA) round out the book to make Financial Modeling a complete guide for the financial modeler.

The new edition of Financial Modeling includes a number of innovations. A new section explains the principles of Monte Carlo methods and their application to portfolio management and exotic option valuation. A new chapter discusses term structure modeling, with special emphasis on the Nelson-Siegel model. The discussion of corporate valuation using pro forma models has been rounded out with the introduction of a new, simple model for corporate valuation based on accounting data and a minimal number of valuation parameters.

Praise for earlier editions
“Financial Modeling belongs on the desk of every finance professional. Its no-nonsense, hands-on approach makes it an indispensable tool.”
—Hal R. Varian, Dean, School of Information Management and Systems, University of California, Berkeley

Financial Modeling is highly recommended to readers who are interested in an introduction to basic, traditional approaches to financial modeling and analysis, as well as to those who want to learn more about applying spreadsheet software to financial analysis."
—Edward Weiss, Journal of Computational Intelligence in Finance

“Benninga has a clear writing style and uses numerous illustrations, which make this book one of the best texts on using Excel for finance that I've seen.”
—Ed McCarthy, Ticker Magazine

This book provides an innovative, integrated, and methodical approach to understanding complex financial models, integrating topics usually presented separately into a comprehensive whole. The book brings together financial models and high-level mathematics, reviewing the mathematical background necessary for understanding these models organically and in context. It begins with underlying assumptions and progresses logically through increasingly complex models to operative conclusions. Readers who have mastered the material will gain the tools needed to put theory into practice and incorporate financial models into real-life investment, financial, and business scenarios.

Modern finance’s most bothersome shortcoming is that the two basic models for building an optimal investment portfolio, Markowitz’s mean-variance model and Sharpe and Treynor’s Capital Asset Pricing Model (CAPM), fall short when we try to apply them using Excel Solver. This book explores these two models in detail, and for the first time in a textbook the Black-Litterman model for building an optimal portfolio constructed from a small number of assets (developed at Goldman Sachs) is thoroughly presented. The model’s integration of personal views and its application using Excel templates are demonstrated. The book also offers innovative presentations of the Modigliani–Miller model and the Consumption-Based Capital Asset Pricing Model (CCAPM). Problems at the end of each chapter invite the reader to put the models into immediate use. Fundamental Models in Financial Theory is suitable for classroom use or as a reference for finance practitioners.

Downloadable instructor resources available for this title: solution manual

Business Performance Analysis Using Operations Measures and Tools

Investors and analysts often need to look into a firm’s operations more deeply than traditional financial statements and models allow. This book describes newly developed tools for using operations metrics to discern and influence the valuation of a firm. It is the first to present these techniques from a unified perspective: that of operations forensics, which looks at operations management not from the traditional point of view of a manager but from that of an investor or shareholder.

After a discussion of financial statements and the useful but incomplete insights they provide, the book covers the three components of operations forensics: operational indicators, operations details that can predict future performance; operational due diligence, methods for verifying companies’ claims about operational excellence and valuing their operational assets; and operational turnaround, an innovative approach to buyout and turnaround strategies. The text also offers brief reviews of operations management concepts, real-world examples of operations forensics, and a glossary. The mathematical material gradually increases in sophistication as the book progresses (but can be skipped without loss of continuity). Each chapter concludes with a “Takeaways and Toolkit” section, a brief summary of prior research, and suggestions for further reading.

Operations forensics offers powerful tools and frameworks for financial analysts, private equity firms, managers, and consultants. This book provides a valuable resource for MBA students and practitioners. Downloadable supplementary material for instructors incudes figures form the text and 42 slides that can be used for class presentations.

A Math Tool Kit

This text offers an accessible yet rigorous development of many of the fields of mathematics necessary for success in investment and quantitative finance, covering topics applicable to portfolio theory, investment banking, option pricing, investment, and insurance risk management. The approach emphasizes the mathematical framework provided by each mathematical discipline, and the application of each framework to the solution of finance problems. It emphasizes the thought process and mathematical approach taken to develop each result instead of the memorization of formulas to be applied (or misapplied) automatically. The objective is to provide a deep level of understanding of the relevant mathematical theory and tools that can then be effectively used in practice, to teach students how to “think in mathematics” rather than simply to do mathematics by rote. Each chapter covers an area of mathematics such as mathematical logic, Euclidean and other spaces, set theory and topology, sequences and series, probability theory, and calculus, in each case presenting only material that is most important and relevant for quantitative finance. Each chapter includes finance applications that demonstrate the relevance of the material presented. Problem sets are offered on both the mathematical theory and the finance applications sections of each chapter. The logical organization of the book and the judicious selection of topics make the text customizable for a number of courses. The development is self-contained and carefully explained to support disciplined independent study as well. A solutions manual for students provides solutions to the book’s Practice Exercises; an instructor’s manual offers solutions to the Assignment Exercises as well as other materials.

Downloadable instructor resources available for this title: instructor's manual

This comprehensive introduction to economic growth presents the main facts and puzzles about growth, proposes simple methods and models needed to explain these facts, acquaints the reader with the most recent theoretical and empirical developments, and provides tools with which to analyze policy design. The treatment of growth theory is fully accessible to students with a background no more advanced than elementary calculus and probability theory; the reader need not master all the subtleties of dynamic programming and stochastic processes to learn what is essential about such issues as cross-country convergence, the effects of financial development on growth, and the consequences of globalization. The book, which grew out of courses taught by the authors at Harvard and Brown universities, can be used both by advanced undergraduate and graduate students, and as a reference for professional economists in government or international financial organizations. The Economics of Growth first presents the main growth paradigms: the neoclassical model, the AK model, Romer’s product variety model, and the Schumpeterian model. The text then builds on the main paradigms to shed light on the dynamic process of growth and development, discussing such topics as club convergence, directed technical change, the transition from Malthusian stagnation to sustained growth, general purpose technologies, and the recent debate over institutions versus human capital as the primary factor in cross-country income differences. Finally, the book focuses on growth policies--analyzing the effects of liberalizing market competition and entry, education policy, trade liberalization, environmental and resource constraints, and stabilization policy--and the methodology of growth policy design. All chapters include literature reviews and problem sets. An appendix covers basic concepts of econometrics.

Downloadable instructor resources available for this title: solution manual

Theory and Applications

The marginal cost of public funds (MCF) measures the loss incurred by society in raising additional revenues to finance government spending. The MCF has emerged as one of the most important concepts in public economics; it is a key component in evaluations of tax reforms, public expenditure programs, and other public policies. The Marginal Cost of Public Funds provides a unified treatment of the MCF, carefully developing its theoretical foundations in a variety of contexts and describing its application to a wide range of policies—from excise taxes in Thailand to public sector borrowing in Canada and the United States.

The Marginal Cost of Public Funds develops the basic theory of the MCF within the framework of public economics and shows how it is related to the traditional measures of the efficiency loss from distortionary taxation. The MCF concept is then applied to the major sources of revenues for governments—sales and excise taxes, taxes on labor income, taxes on the return to capital, public sector borrowing, and intergovernmental grants. This book will be an essential reference for economists and public policy analysts both in and out of government. Exercises and recommendations for further reading at the end of each main chapter highlight its usefulness as a supplementary text in advanced undergraduate or graduate courses in public economics.

Over the last thirty years, a new paradigm in banking theory has overturned economists' traditional vision of the banking sector. The asymmetric information model, extremely powerful in many areas of economic theory, has proven useful in banking theory both for explaining the role of banks in the economy and for pointing out structural weaknesses in the banking sector that may justify government intervention. In the past, banking courses in most doctoral programs in economics, business, or finance focused either on management or monetary issues and their macroeconomic consequences; a microeconomic theory of banking did not exist because the Arrow-Debreu general equilibrium model of complete contingent markets (the standard reference at the time) was unable to explain the role of banks in the economy. This text provides students with a guide to the microeconomic theory of banking that has emerged since then, examining the main issues and offering the necessary tools for understanding how they have been modeled.

This second edition covers the recent dramatic developments in academic research on the microeconomics of banking, with a focus on four important topics: the theory of two-sided markets and its implications for the payment card industry; "non-price competition" and its effect on the competition-stability tradeoff and the entry of new banks; the transmission of monetary policy and the effect on the functioning of the credit market of capital requirements for banks; and the theoretical foundations of banking regulation, which have been clarified, although recent developments in risk modeling have not yet led to a significant parallel development of economic modeling.

A Citizen's Guide to the Debate over Taxes

As Albert Einstein may or may not have said, "The hardest thing in the world to understand is the income tax." Indeed, to follow the debate over tax reform, the interested citizen is forced to choose between misleading sound bites and academic treatises. Taxing Ourselves bridges the gap between the two by discussing the key issues clearly and without a political agenda: Should the federal income tax be replaced with a flat tax or sales tax? Should it be left in place and reformed? Can tax cuts stimulate the economy, or will higher deficits undermine any economic benefit? Tax policy experts Joel Slemrod and Jon Bakija lay out in accessible language what is known and not known about how taxes affect the economy, offer guidelines for evaluating tax systems, and provide enough information to assess both the current income tax system and the leading proposals to reform or replace it (including the flat tax and the consumption tax).

The fourth edition of this popular guide has been extensively revised to incorporate the latest information, covering such recent developments as the Bush administration's tax cuts (which expire in 2011) and the alternatives proposed by the President's Advisory Panel on Federal Tax Reform. Slemrod and Bakija provide us with the knowledge and the tools—including an invaluable voter's guide to the tax policy debate—to make our own informed choices about how we should tax ourselves.

Contract Theory by Patrick Bolton and Mathias Dewatripont, a comprehensive textbook on contract theory suitable for use at the graduate and advanced undergraduate levels, covers the areas of agency theory, information economics, and organization theory and presents many applications in all areas of economics, especially labor economics, industrial organization, and corporate finance. The exercises at the end of the book not only review, chapter by chapter, the basic concepts introduced in the text but also explore additional ideas and applications based on teaching material accumulated over the years by the authors and other instructors of contract theory. The solutions manual to this essential text gives complete solutions to 27 of the 54 exercises in the text, allowing students to study and compare their answers and take greater advantage of this crucial part of the book. The solutions manual follows the structure of the text, grouping exercises by chapter. Chapters 2-6 cover such static bilateral contracting problems as screening, signaling, and moral hazard; chapters 7 and 8 treat multilateral contracting, including auctions, bilateral trade under private information, and multiagent moral hazard; chapters 9 and 10 explore problems of repeated bilateral contracting; and chapters 11-13 cover incomplete contracts, the theory of ownership and control, contracting with externalities, and common agency. Arthur Campbell, Moshe Cohen, Florian Ederer, and Johannes Spinnewijn are all Ph.D. candidates in Economics at MIT.

This text, intended for both graduate students and professional researchers, is an effective, concise introduction to the structural econometrics of auctions. Tools from recent developments in theoretical econometrics are combined with established numerical methods to provide a practical guide to most of the main concepts in the empirical analysis of field data from auctions. Among other things, the text is remarkable for a large number of mathematical problems and computer exercises for which sample solutions are provided at the end of the book. In the case of the computer exercises, sample code written in Matlab provides a ready-made toolbox that allows readers to implement many existing empirical specifications efficiently.

In the first two chapters, the authors introduce several important issues in the analysis of field data from auctions and then go on to develop a simple theoretical model within the independent, private-values paradigm. In the third chapter, under several data-generating schemes, the authors outline empirical methods for analyzing data from single-unit Vickrey and English auctions, while in the fourth chapter, they outline methods for analyzing data from single-unit, Dutch, and first-price sealed-bid auctions. In the fifth chapter, the authors discuss theoretical issues important in the analysis of multi-good auctions, focusing on the analysis of multi-unit auctions, and then provide examples of some recent strategies designed to analyze data from these auctions. Included at the end are a number of appendixes that review the technical tools required in developing the topics treated in the text. A CD-ROM containing sample computer code and data sets accompanies the text.

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