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Financial Modeling and Analysis
A CUSTOMIZED TECHNOLOGY FOR FINANCIAL, INVESTMENT, AND RISK INTELLIGENCE
Worapot Ongkrutaraksa







For my dearest wife, Yorsri



Third Edit ion
Financial Modeling and Analysis

A CUS TOMI ZED TECHNOLOGY F OR FI NANCI AL, I NVES TMENT, AND RI S K I NTEL LI GENCE
Worapot Ongkrutaraksa, Ph.D.
Third Edit ion
T A B L E O F C O N T E N T S
Table of Contents

F O R E W O R D vii

Preface ix
Objectives of the Book............................................................ ix
Organization of the Book........................................................xii
Expectations from the Book...................................................xiv
About the Author.................................................................... xv
Acknowledgements ...............................................................xvi

C H A P T E R 1
I nt roduct ion t o Financial Modeling 1
From Financial Models to Business Intelligence...................... 1
Objective Matrix of Business Intelligence ................................ 2
Information Flows in Business Intelligence.............................. 7
Essential Spreadsheet Functions .......................................... 10
Model 1A: Cash Account Model ............................................ 23
Model 1B: Income Tax Model ................................................ 27
Model 1C: Rates Matrix Model .............................................. 31

C H A P T E R 2
Analysis of Time Value of Money 33
Future Value and Compounding Process.............................. 33
Present Value and Discounting Process ............................... 35
Variations in Compounding and Discounting......................... 35
Discounted Cash Flow Valuation........................................... 39
Model 2A: Time Value of Money Model ................................. 41
Model 2B: Loan Amortization Model ...................................... 45
Model 2C: Retirement Account Model ................................... 51

C H A P T E R 3
Analysis of Discount Rat es 55
Firm-based Discount Rates .................................................. 56
Market-based Discount Rates ............................................... 58
Weighted Average Cost of Capital......................................... 61
Model 3A: Dividend Discount Model ...................................... 63
Model 3B: Capital Asset Pricing Model.................................. 67

C H A P T E R 4
Analysis of Business Value 73
Business Valuation Approaches............................................ 73
Value Drivers of Business Enterprises.................................. 78
Valuation and Creditor Riskiness .......................................... 78
Valuation and Investor Riskiness .......................................... 79
Model 4A: Earnings per Share Model ................................... 81
Model 4B: Relative Valuation Model ..................................... 89
Model 4C: Intrinsic Valuation Model...................................... 93

C H A P T E R 5
Analysis of Financial St at ement s 99
Purposes of Financial Reports .............................................. 99
Standardized Financial Statements..................................... 100
Reformulated Financial Statements .................................... 103
Key Performance Indicators................................................ 106
Model 5A: Performance Evaluation Model .......................... 109
Model 5B: Pro Forma Statements Model ............................ 119

C H A P T E R 6
Analysis of Capit al I nvest ment s 131
Types of Investment Opportunities...................................... 131
Uses and Limitations of Capital Budgeting.......................... 133
Investment Decision-making Process ................................. 134
Modeling Technique for Capital Budgeting ......................... 135
Impacts of Financing Decisions on Value .......................... 140
Model 6A: Capital Budgeting Model .................................... 144
Model 6B: Capital Structure Model...................................... 149

C H A P T E R 7
Analysis of Port folio I nvest ment s 157
Return and Risk Measures of Financial Assets................... 157
Theory of Portfolio Selection and Investments.................... 159
Risky Asset Allocation and Portfolio Optimization............... 167
Model 7A: Risky Asset Portfolio Model ............................... 169
Model 7B: Portfolio Optimization Model .............................. 175
Financial Modeling and Analysis v Third Edit ion
T A B L E O F C O N T E N T S
C H A P T E R 8
Analysis of Fixed I ncome Securit ies 179
Determinants of Market Interest Rates................................ 179
Theory of Interest Rates and Bond Yields........................... 180
Using Yields to Forecast Future Short Rates ...................... 182
Bond Price Sensitivity, Durations, and Convexity................ 183
Using Duration to Immunize Bond Portfolio Returns ........... 186
Model 8A: Bond Valuation Model ........................................ 191
Model 8B: Bond Durations Model ........................................ 183
Model 8C: Bond Yields Model ............................................. 195

C H A P T E R 9
Analysis of Forwards, Fut ures & Swaps 203
Distinctions between Forward and Futures ......................... 203
Forward Price and Forward Contract Valuation................... 204
Futures Price and Futures Contract Valuation..................... 207
Risk Management and Hedging Strategies ......................... 210
Return Enhancement and Arbitrage Strategies ................... 212
Forward Rate Agreements and Interest Rate Swaps .......... 215
Balance Sheet Management and Swap Strategies ............. 227
Model 9A: Forward Pricing Model........................................ 233
Model 9B: Hedging Transactions Model .............................. 239
Model 9C: Interest Rate Swaps Model ................................ 231

C H A P T E R 1 0
Analysis of Opt ions & Cont ingent Claims 249
Contingent Claim Fundamentals ......................................... 249
Contingent Claim Valuation Concept................................... 251
Financial Option Contracts .................................................. 254
Real Option Analysis ........................................................... 256
Alternative Option Pricing Models........................................ 258
Empirical Evidence of Option Mispricing ............................. 267
Model 10A: Replication Option Pricing Model ..................... 269
Model 10B: Delta-ratio Option Pricing Model....................... 273
Model 10C: Risk-neutral Option Pricing Model .................... 279
Model 10D: Binomial Option Pricing Model ......................... 281
Model 10E: Black-Scholes-Merton Model............................ 285

C H A P T E R 1 2
Analysis of Financial Risks 287
Stochastic Diffusion Processes........................................... 287
SDP Applications in Risk Measurement.............................. 289
Asset Price and Return Simulations.................................... 294
Value-at-Risk Measures...................................................... 297
Credit Risk Measures.......................................................... 298
Model 11A: Returns Simulation Model ................................ 305
Model 11B: Value-at-Risk Model......................................... 311
Model 11C: Credit Risk Model............................................. 317

C H A P T E R 1 3
Epilogue t o Financial Modeling 323
What We Have Learned So Far .......................................... 323
What We Should Do Next ................................................... 324
Chartered Financial Analyst (CFA

).................................... 325
Financial Risk Manager (FRM

).......................................... 327
Academic Programs in Advanced Finance ......................... 328
Closing Remarks................................................................. 330

B I B L I O G R A P H Y 331

I N D E X 341
Financial Modeling and Analysis vi Third Edit ion

Foreword

This book introduces essential concepts, applications, and techniques in financial, investment, and risk
intelligence yet takes an unorthodox approach to its readers. By directly practicing on and interacting
with spreadsheet exercises that are packaged for easy understanding and maneuvering, the readers will
have an opportunity to discover, and a flexibility to consult, the theory and evidence leading to any
particular financial problem discussed herein or from other texts in the field. This on-the-job-training
approach is analogous to learning how to communicate in a foreign language for the first time by
actively mingling with local people and being assimilated into their culture instead of passively going
through a series of grammatical lessons first. A novice would gradually become a fluent practitioner
equipped with different flexible ways to cultivate her quantitative and computational finance
knowledge while enhancing her financial modeling and business-solution development skills.
The first use of this book is to assist the readers to jump-start their business and financial analysis
careers by integrating this newly acquired knowledge and skills in financial modeling with their relevant
business backgrounds. Accountants who traditionally collect, record, and report operating and
financial data from their companies business activities could now perform advanced and more
sophisticated analyses on valuation, investment, and risk management. Operation, distribution, and
marketing managers whose production, logistic, and sale targets depend on the estimate of customer
demands in different geographical areas and seasonal periods, or consumer preferences that are closely
tied with their demographical profiles, could also perform various types of quantitative and statistical
analysis through spreadsheet modeling similar to many practice exercises demonstrated in this book.
Most importantly, the book allows its audience to be less reliant on any formal lecture without sacrificing
the classrooms rigor yet gain more control over their study pace and learning development.
To a group of practitioners in the professional world, this book would help unify the team members
interests to focus on the business and modeling problems at hand. In a consulting firm, for example,
specific clients cases can be addressed based on their objectives, input data, and interface requirements
within the constraints of their resource and timetables, combined with diverse experiences of the team
members in problem prognosis and situational analysis as well as their expertise in intelligence
gathering, data-mining and warehousing, and design of and training for customized business solutions.
All they need to do is ascertain that coordination between the client and the team as well as among the
team members themselves is carried out in a cost-effective manner. Like an instruction manual, this
book shall direct the firms coordination efforts by keeping track of the progress of the teams tasks in
terms of what has been left out and which of them need to be accomplished along the priority list.
Those who intend to employ this book as part of their finance instructions and training modules
within the academic institution or professional setting will find it quite easy to adopt because the book
encapsulates the main finance topics that are regularly taught everywhere. The benefit of assigning this
book to the students lies on skill-building modeling exercises that will help in their preparation before
attending classes and their review afterwards. Various technical problems they have encountered
during their practices can be shared with and resolved through their instructors and classmates. Rather
than providing unilateral lectures all the time, the instructors could welcome and entertain their
students questions and comments while still focusing on relevant topics. When it comes to group or
individual project assignments, the students will be able to apply different models they have practiced
to their own projects without requiring constant assistance from their instructors. The expectations of
both the instructors and students will be more aligned and better fine-tuned to each other.
Clearly, the use of this book is not limited to just the above audiences it intends to serve. It is also
recommended to any individual who would like to approach finance differently and gain insights into
how to implement many finance formulae to exploit the vast opportunities in todays financial markets.

Financial Modeling and Analysis vii Third Edit ion
O B J E C T I V E S O F T H E B O O K

Preface
Objectives of the Book
ongratulations for making a prudent decision to invest your money in this book.
You can envisage how to profit from it by quickly browsing through its chapters.
It is fair to present to you here the formal objectives of the book as they are
intended in relation to your search for cutting-edge financial technology that is made easy
to understand and practice, as well as how it might help in adding value to your
professional endeavors.
C
What You Will Learn from This Book
There are two sets of learning outcomes you will gain from Financial Modeling and Analysis.
First is the linkage between finance theories and their applications, which includes:
Financial Measurement As an owner of business enterprise or a corporate manager
acting on behalf of shareholders, your responsibilities are planning, managing, and
making decisions on various operating, investment, and financing activities in order to
maximize the market value of your company. Despite your extensive experiences, you
still need a set of proven tools and techniques to assist you in ascertaining that your
decisions are prudent. Financial models represent such measurement tools that allow
you to try out your alternative strategies on different business and market scenarios.
Practically, you could construct a pro forma statements model to see the impacts on the
firms future performance from a change in one or more value-added programs. You
could use a capital budgeting model to evaluate the feasibility of your investment proposal,
be it a start-up project or a merger deal. You could also utilize a capital structure model to
choose the least-cost financing arrangement from among competing corporate loans
and security issues. In combination, you would expect the models to help confirm
your prior beliefs by factoring every aspect of business and market possibilities into
your calculated decision-making processes to ascertain that every dimension of your
strategic and tactical formulations has been tested against those possibilities.
Investment Measurement As an investor or a manager of an investment fund, your
function is to ensure that the total return on your portfolio investment is at least equal
to the return on a passively held yet well-diversified market portfolio. Since your
investment decisions are closely tied with the movements in market prices of different
asset classes, your prerogative is to thoroughly know the behavior of those asset prices
in order to estimate their future likelihood and impact on your portfolios total return.
To measure returns, you need to be well versed in various types of valuation models
like dividend discount model, capital asset pricing model, bond yields model, forward pricing model,
and option pricing models, which are standard techniques found in most finance books.
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O B J E C T I V E S O F T H E B O O K P R E F A C E
The quantitative tools that enable you to study the behavior of risky assets under
normal market circumstances include stochastic diffusion models, simulation models, and
various families of probability and distribution models. Finally, portfolio optimization model
would allow you to construct a dynamically optimal portfolio that takes into account
assets cross-sectional returns and their intertemporal movements. Altogether, these
models are performed to help you observe the overall risk-return profiles of your
investments and execute your well-informed trading decisions with greater confidence.
Risk Measurement As a corporate risk manager or a financial engineer, your task is
to quantify the extent, and harness the severity, of business and financial risks to which
your company or clients are exposed. As market structures and composites change
due to unanticipated shifts in demand or supply, each event would magnify the severity
of risk manifold. To help them make better decisions, you need to acquire an in-depth
knowledge of derivative instruments, risk-quantification tools, and risk-management
techniques so that those exposures can be priced accurately and mitigated promptly.
In quantifying financial risk, you can approach its categories properly, including market
risk, credit risk, and operational risk. Market risk arises from random changes in asset
prices that result in liquidity losses from spot-price differentials and basis losses
from forward-price differentials. Credit risk leads to a loss of the entire investment due
to the counterpartys default, which is induced by either market risk or operational risk
faced by that counterparty. Operational risk is engendered from within the firm as a
result of failure to effectively monitor and control market risk and credit risk.
To capture market risk, you could utilize a value-at-risk model with such controllable
parameters as target critical value or target probability of loss. You could extend it into
a credit risk model to measure the default risk of a loan given the credit-rating profiles of
borrowers and their actuarial probabilities of default. Both models serve corporate risk
managers or financial engineers to provide valuable intelligence and recommendations
to their recipients in an accurate and timely manner.
The second set of learning outcomes involves an acquisition of practical skill in analytical
and computerized modeling that comprises:
Financial Model Planning Your initial task as a financial analyst is to map out a plan
for your financial models. This planning stage involves: 1) the identification of
financial problems within the scope of your business context; 2) the specification of
modeling objectives that uniquely and straightforwardly address your financial
problems; 3) the selection and classification of the relevant input variables and
database for the models; and 4) the design of financial models with proper objective
structures and information flows that would produce the desired output results. The
conceptual framework for financial model planning is thoroughly discussed in
Chapter 1 along with a few preliminary modeling exercises on which you can practice.
Spreadsheet Model Building After the planning stage, you will be ready to build
your own financial model on a computer platform. Traditionally, the models are
constructed as a series of mathematical and statistical equations that require manual
calculations and perhaps some additional manipulations and transformations. With
todays computer technology, we have been able to construct and implement those
traditional mathematical and statistical models on the so-called spreadsheet applications.
One of the more popular spreadsheet applications is Microsoft

Excel which allows us to


visually build our financial models with ease.
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O B J E C T I V E S O F T H E B O O K P R E F A C E
Financial Modeling and Analysis xi Third Edit ion
Based on the blueprints drafted in our plans during the initial stage, we could create a
variety of highly flexible financial models that respond to changes in input variables
and any methods of end-user intervention or interaction permitted by the models. A
package of various different financial models that is designed to tackle a set of financial
or business problems is sometimes called a business solution.
Since each business solution is customized to address specific financial problems, it
may not apply to other problems. Still, there are some commonalities that every
business solution shares in terms of objective structures and information flows. It is
just a matter of what types of input, analytical, and output sub-models are necessary
for the business solution to perform its task successfully. You shall learn how to
implement different financial models under each analytical topic from Chapter 2
through Chapter 11.
Quantitative Decision Making Well-designed and constructed business solutions do
not readily translate into effective decisions. You have to always be aware that a
financial model or business solution is not an end to itself. It is the ultimate task of
financial modelers to provide relevant information and intelligence for financial
analysts and other end-users to make accurate and timely decisions. As such, your
business solutions must incorporate some reporting features that allow the end-users
to grasp and discern the output results without difficulty and to trace the origins of
those results without complexity.
Good business solutions do not require frequent changes in their underlying structural
integrity. Yet, they should be flexible enough for the end-users to change, add, or
delete their input specifications, interrupt the computational flows to obtain some
intermediate results, and interact with them in a highly intelligent manner. In view of
this added versatility, the mundane Excel spreadsheet program may not be adequate.
Other high-level programming capabilities such as Visual Basic for Applications (VBA)
or Visual Basic .NET are required to make your basic business solutions more flexible
and intelligent. Given that this book is about an introduction to computational
finance, you will not have yet been introduced to those advanced modeling techniques.
How You Can Use This Book in Your Career
Taking a birds eye perspective, you would ask what good this knowledge and skill does in
your professional life. For one, it helps you become more scientific when approaching
any financial problem. You would want to verify your innovative ideas on some models
first before you bet your hard-earned money on them. The more realistic your models
are, the more confident in the results of your financial strategies you will be. Secondly,
possessing a rare skill in designing, constructing, and implementing the cutting-edge
financial technology that is always in high demand creates a strong bargaining power for
you in the job market. It would make you stand out from the crowd with your capability
to deliver results to, not take advantage from, your employers.
Thirdly, it enables you to customize proprietary business solutions that could only be
marketed to the end-users by you. Each business solution has its own personality: the
one descending directly from its designer and modeler. The possibilities are unlimited as
there are countless financial problems facing individuals and corporations everyday, each
differing from another. If you could find your own market niche for your business
solutions by specializing in a certain area, you would sustainably gain a commanding
height over that whole market niche unchallenged.
O R G A N I Z A T I O N O F T H E B O O K P R E F A C E
And finally, you could benefit tremendously from the stockpile of knowledge in finance
and information technology that has been accumulated from the past to its current critical
mass. As your business solutions have been put to work more often, they would
eventually become a part of public knowledge base that invites others to utilize them.
Your contributions in the area would ignite others to challenge and perhaps modify or
extend your models to fit the new market reality of the future. This spirit of sharing ideas
and competition to make them even better should give you a greater fulfillment for which
no monetary benefit can substitute.
Organization of the Book
In this third edition, there are twelve chapters with a new model being added to Chapter 4
of the second edition. Chapter 1 deals with a framework for financial modeling in its
planning stage. Several important issues are addressed such as what distinguishes a basic
financial model from a fully fledged business solution, what kind of objective structures
and information flows are available as building blocks for the design and construction of
effective business solutions, and what different types of input, analytical, and output
models are necessary for a complete business-solution package.
Chapter 2 discusses about the fundamental concept of time value of money (TVM), which has
always been mentioned at the start of most introductory finance textbooks. Such is the
case because all valuation problems have to go through this TVM process one way or
another, based on the assumption that value is driven by the prospect of the future cash
flows the underlying asset is expected to generate. Thus, any financial analysis that is
conditioned upon different time periods and horizons cannot escape TVM analysis.
Compounding and discounting techniques as well as their variants are expositively
presented in formulaic forms and demonstrated through various simplified examples.
In Chapter 3, the focus is on the analysis of discount rates, i.e., the rates at which future cash
flows are discounted to the current period. We sometimes refer to them as growth rates or
the rates at which current cash flows are compounded geometrically into the future.
From corporate point of view, discount rates are known as its costs of capital. You shall see
how different types of cost of capital are derived or estimated from publicly available
accounting information or historical market data, e.g., price series and return distributions.
For those of you who are familiar with the basic valuation methods for common stocks,
you will have the opportunity to construct the two popular discount-rate estimation
models: the dividend discount model (DDM) and the capital asset pricing model (CAPM).
The applications of TVM and discount rates are underscored in Chapter 4 for the purpose
of ongoing business valuation. Three approaches to valuation are explored conceptually
with implications for value drivers and related risks exposed to the firms creditors and
investors. Economic-based valuation utilizes the discounted cash flows (DCF) of the firm as
the proxy for its fair value. The sources and risks of cash flows are identified from
relevant value-added activities, which are usually observed from the firms strategic
intents, competitive responses, and market expectations. Accounting-based valuation is
the alternative approach that relies more on the firms financial statements information to
estimate fair value from key performance indicators (KPIs) through earnings per share (EPS),
relative valuation (RV) and intrinsic valuation (IV) models. This chapter introduces the
quantitative-based valuation that encompasses the concepts of risk-neutral valuation (RNV)
and stochastic diffusion processes (SDP) as precursors to the advanced analysis of financial risk
and its impacts on valuation.
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O R G A N I Z A T I O N O F T H E B O O K P R E F A C E
Financial Modeling and Analysis xiii Third Edit ion
Chapter 5 tackles the accounting-based valuation approach in detail. Important financial
accounting concepts are explored and discussed in light of the generally accepted accounting
principles (GAAP) and the way in which such GAAP financial statements are reformulated
to elicit additional information about value drivers through historical KPIs. The use of
those KPIs is highlighted in a performance evaluation model whereby the firms operating and
financing capability, productivity, and leverages are thoroughly diagnosed and interpreted.
Steps towards developing a pro forma statements model for the purpose of extrapolating and
forecasting KPIs and its value drivers are also shown. All financial intelligence derived
from these models collectively forms the basis for the analysis of capital investments.
The main theme in Chapter 6 is the capital budgeting technique, which is the building
block for economic-based valuation approach. The DCF method is elaborately applied
there to extract the three major investment decision criteria, namely the net present value
(NPV), the modified internal rate of return (MIRR), and the discounted payback periods (DPB).
Different types of cash flows derived from the pro forma statements model are employed
within a capital budgeting model while making use of the weighted average cost of capital (WACC)
as the appropriate discount rate. The capital structure model allows you to estimate WACC
from a combination of pro forma statements and capital budgeting models wherein the
firms rate of return on equity is optimized based on the tradeoff between the incremental
tax benefit from financial leverage and the incremental bankruptcy cost of additional debt.
A transition is made from the analysis of firm-based real investments to that of market-
based portfolio investments in Chapter 7. Its emphasis is on how to delineate the return-
risk profile of a risky asset or a composite of assets with different risk classes. The use of
basic mathematical and statistical techniques to identify and derive stand-alone and
relative parameters for return and risk is discussed through a variety of formulae and
equations, which are further implemented in spreadsheet models. Major theory and
models in portfolio investments are also highlighted, namely the mean-variance efficiency model
(MVE), the factor model, the CAPM, and the arbitrage pricing theory (APT). The chapter also
touches upon the applications and empirical testing of portfolio investment theory, risky
asset allocation, and portfolio optimization.
Chapter 8 discusses the relationship between interest rates and the value of fixed-income
assets such as corporate bonds. It offers some insights into why interest rates prevailing
in financial markets vary from time to time and how they can be quantified. It also serves
to relax the assumption of fixed and known interest rates in our previous TVM and DCF
frameworks. You shall learn that there are many definitions of interest rate that market
participants have been using. Such various definitions are mentioned when discussing the
theory of term structures. Three essential models could be constructed in light of this chapter:
bond valuation model, bond durations model, and bond yields model. Special attention should be
paid to the third model wherein coupon bonds with different maturities are priced as
though they were zero-coupon bonds based on their periodic cash flows and yields.
In Chapter 9, you will be introduced to forward, futures, and swap contracts that are vital
financial instruments for market participants to cope with their foreseeable transactions,
hedge their undesirable risks, and/or speculate for arbitraged profits. Using an arbitrage-
free argument for pricing, forward and futures contracts should theoretically have a zero
value at the time of contract initiation since no cash or asset changes hand on that date.
Yet, empirical evidence suggests that there have been mispricing occurrences within the
futures market that give rise to profiteering opportunities. At the end of this chapter, you
shall practice on the forward pricing model, hedging transactions model, and interest rate swaps model.
O R G A N I Z A T I O N O F T H E B O O K P R E F A C E
The framework for financial option valuation and contingent claims analysis (CCA) is
explored in Chapter 10 with reference to standard plain-vanilla option contracts. Based
upon arbitrage-free and risk-neutral arguments, options serve not only as a means to
manage financial risk by offering guaranteed prices for the option holders to buy or sell
the underlying assets irrespective of market circumstances or price movements but also
as a tool to enhance returns on customized financial products traded over-the-counter
among counterparties. The option pricing mechanisms are shown throughout the
chapter with five supporting models, including the famous Black-Scholes-Merton (BSM)
continuous-time option pricing model and Cox-Ross-Rubinstein (CRR) discrete-time option
pricing model.
Chapter 11 deals with the issues encompassing financial risk in a dynamic yet stochastic
framework, which is different from the static analysis of market risk under the portfolio
theory or liquidity risk under the term structure theory. Stochastic analysis of asset prices
and return behavior relaxes the error-prone assumption of subjective probability measures
about the future likelihood of the state of economy you are tempted to make or impose in
your financial models. It allows you to perform different kinds of simulation models to test
whether your investment proposals could withstand the severity of any given worst-case
market scenario. The theory and concepts of stochastic diffusion processes mentioned earlier
are revisited there with applications to equity securities, fixed-income instruments, and
contingent claims. The chapter also covers techniques on VaR and credit risk modeling,
both of which bear high institutional and regulatory significance for financial services
industry across the globe, especially in the wake of the revised international bank capital
adequacy standards or the Basel Accords.
Finally, after you have finished exploring every chapter and practicing every model in this
book, you would appreciate more about both the implicit and explicit synergies among
theories, techniques, and tools that have currently been used in finance, investments, and
risk management. In Chapter 12, there are some guidelines for you to consider. If you
plan to become an expert in value management, you might want to take the Chartered Financial
Analyst

(CFA) examination. If you would like to specialize in risk management, you should
consider taking the Financial Risk Manager

(FRM) examination. The requirements for
these professional designations are quite stringent and demand high personal
commitments and sacrifice from the candidates. You can obtain additional information
from their official websites mentioned in that chapter.
Expectations from the Book
Although one could practice all models until mastering the material included herein, it by
no mean guarantees that one would be able to tackle all real-life financial problems. This
book expects its users to continue their personal as well as professional quests for both
incremental and innovative techniques in order to customize their developed business-
intelligence systems to become ones that are able to effectively handle any integrated issue
arising from financial, investment, and risk measurement and/or management problems.
Its author enthusiastically encourages users to interact with him through the books online
resources to shorten their journey from being novice practitioners in financial modeling to
becoming expert customizers of business intelligence. The trick lies in a study technique
called reverse engineering where one resolves any given set of problems backward while
untangling each knot of a rope in the process. That is probably an ultimate value the
books users would have expected it to deliver to them in return.
Financial Modeling and Analysis xiv Third Edit ion
A B O U T T H E A U T H O R P R E F A C E

About the Author
Worapot Ongkrutaraksa, also known as Warren Wu, is an associate professor of
finance at the Beijing Normal UniversityHong Kong Baptist Universitys United
International College located in the special economic zone of Zhuhai in southern China.
Dr. Ongkrutaraksa used to lead the School of Management of Shinawatra International
University in Thailand to sustain its earned top-ranking research university status while
spearheading an innovative development of entrepreneurially oriented academic programs
in management and professionally focused coaching programs in finance. He also served
as a lecturer of finance at Curtin University of Technology in Perth, Australia, between
2003 and 2011 where he conducted undergraduate and postgraduate courses in financial
analysis, financial modeling, financial statement analysis, and fixed-income securities.
Being a Fulbright Scholar and holding two public-policy degrees from the University of
Southern California and Harvard University and two finance degrees from Sasin Graduate
Institute of Business Administration and Kent State University, Dr. Ongkrutaraksa has
taught financial accounting, corporate finance, financial management, and financial
institutions policy at the University of Akron in the United States, the University of
Waikato in New Zealand, and the University of Macau in China in addition to Curtin. He
also served at the Ministry of Finance in Thailand as a fiscal policy researcher. His several
years of professional experience include business and financial analysis and project
planning with multinational oil companies as well as consulting and training experience
for the media, utility and infrastructure, and property and asset management industries.
Dr. Ongkrutaraksa has extensively written working papers, articles, and book chapters on
diverse topics ranging from public-policy issues relating to the regulation and supervision
of international banking and financial services industries as well as macroeconomic and
monetary policy measures to valuation, risk measurement, real options, strategic
investment and financing decisions, and review of fixed-income securities, derivatives, and
swaps markets. His current interest has been on the case study-based applications of
advanced computational technology in finance, economic policy, value management, risk
management, and business strategies and processes in general. The website containing
some of his works is accessible at uic-hk.academia.edu/DrWorapotOngkrutaraksa.

Financial Modeling and Analysis xv Third Edit ion
A C K N O W L E D G E M E N T S P R E F A C E
Acknowledgements
This book truly stemmed from a labor of love during my intellectual journey in the
financial economics discipline that consequently shaped my career, and from my ardent
desire to propagate the knowledge and know-how in this area to the widest audience. I
must, first of all, thank all my past teachers, professors, and advisors with whom I had the
privilege to study and by whom I was inspired, as well as my previous and current student
bodies without whom my contributions would be deemed futile.
I would also like to express my deepest gratitude and indebtedness toward all my family
members, including my dearest parents Wisith and Pensri Ongkrutaraksa and siblings
Worawit, Worawan, and Wela Ongkrutaraksa, who have lovingly sacrificed for and
provided me with spiritual support during my arduous years of study in the United States
and still continue to do so in my academic and professional careers.
All of my past and present colleagues at Harvard University, Kent State University,
University of Akron, University of Waikato, University of Macau, and Curtin University
of Technology also deserve my wholehearted thanks and appreciation for their generosity
and willingness to share their valuable thoughts and lend helping hands.
My special appreciation need be further extended to my mentor and current colleagues,
Professor Michael Y. Hu who served as my doctoral dissertation advisor at Kent State
University, Professor Michael J. Gift of the University of Macau, and Associate Professor
Subhrendu Rath of Curtin University of Technology who are my senior colleagues, all of
whom have continued to provide me with strong supports in my career advancements.
I am grateful to Natalie Crouch, Chris Richardson, and Barbara Honor of Pearson
Education Australia as well as the anonymous proofreader at Living Language who have
pooled their editorial efforts to assist me in reviewing my manuscript and accommodating
my desire to present the book the way it is to the readers. I also thank Jim Lilley and
Wendy Miller of Pearson whose tireless coordination in distributing the books to my
tutors and students in various offshore locations has been extraordinarily efficient.
Most important of all, my beloved wife, Yorsri Jongchanachai, whose dedication has been
my strongest driving force to pursue nothing but excellence, deserves my highest
accolade. Her specialization and strength in financial modeling and applied information
technology have been reflected in the many advanced financial models and business
solutions upon which this book has been based.

Worapot Ongkrutaraksa, Ph.D.
Zhuhai, China
January 2013

Financial Modeling and Analysis xvi Third Edit ion