Duration: 2 days
 Yield Curve Estimation
 Advanced Cash Flow Analysis
 Historical Simulations
 Scenario Analysis and Stress Testing
 Monte Carlo Simulation
 Pricing Complex Instruments
 Principal Components Analysis
At this advancedlevel workshop, participants will learn how to develop and implement advanced
financial models in MICROSOFT™ Excel™ and Visual Basic™ for Applications. We shall start with the
estimation of yield curves and advanced cash flow analysis. Participants will learn how to “bootstrap”,
smooth and interpolate the swapcurve (using the Cubic Spline technique), and they will use this curve
to price selected instruments. We will then explain how Excel/VB can be used to perform historical
simulations and scenario analysis. We will also show how “Stress Testing” can be performed using
Extreme Value Theory analysis. After that, we will explain and work handson with the Monte Carlo
Simulation. Participants will learn to generate random numbers and samples from uniform and normal
distributions. We will define the stochastic differential equations (SDEs) for various processes for
equities prices, interest rates etc., and use these SDEs in conjunction with Monte Carlo simulation
routines to price and riskassess various financial instruments, including pathdependent exotic
options. We will show how to use “Cholesky Decomposition” when sampling from multivariate
distributions, and we will discuss possible ways of achieving ”variance reduction”. The techniques are
then used to price a range of complex financial products, such as exotic options. Finally, participants
will learn how to implement “Principal Components Analysis” and how to combine PCA with Monte Carlo
simulation in order to create efficient pricing and risk management applications that can be used in
practice.
Day One
09.00  09.15 Welcome and Introduction
09.15  12.00 Yield Curve Estimation and Cash Flow Analysis
 Yield Curves, Par Curves and Zero Coupon Curves

Estimation Techniques
 Bootstrapping
 Cubic Spline
 Other Estimation Techniques

Estimating and Valuing Complex Cash Flows
 Cash flows with prepayment features
 Computer Workshop (Excel/VB)
Participants program yield curve
estimation routines in Excel/VB and use the estimated yield curves to value complex cash
flows
12.00  13.00 Lunch
13.00  16.30 Monte Carlo Simulation
 Introduction to Monte Carlo Simulation

Monte Carlo Toolkit
 Generating random numbers
 Sampling from normal/lognormal distributions
 Stochastic Differential Equations
 Cholesky Decomposition

Variance reduction techniques
 Stratified sampling
 Control Variate
 Antithetic sampling
 Computer Workshop (Excel/VB)
Participants program and test
sampling routines, SDE’ s and Cholesky factorisation routines
Day Two
09.00  12.00 Pricing Complex Instruments
 Pricing Complex Interest Rate Products
 Defining and Calibrating Interest Rate Models
 Pricing Interest Rate Options and Structured Interest Rate
Products
 Pricing Exotic Interest Rate Structures Using Monte Carlo
Simulation
 Calculating VaR for complex instruments
 Computer Workshop (Excel/VB)
Participants price selected (exotic)
structures using MC simulation
12.00  13.00 Lunch
13.00  16.30 Principal Components Analysis
 Common Factors Affecting Bond Returns
 Overview of MultiFactor Interest Rate Risk Models

The Factor Model
 Eigenvalues, Eigenvectors and the Yield Curve
 Calculating and Interpreting Factor Loadings
 Using the Factor Model to Calculate VaR
 Factor Immunization for Hedging Yield Curve Fluctuations
 Monte Carlo Simulation Using PCA
 Computer Workshop
Participants use PCA to estimate risk factors
and construct optimal, factorimmunized portfolios
Evaluation and Termination of the Workshop