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Financial modeling Essay

Category: Finance & Accounting Pages: 7 Type: Essay Level: College
Variance-covariance
It uses past values of security movements and relationship to determine the estimate of the future loses that could occur. Security movements and security relationship risk is calculated for a given period of time.
Historical simulation models
It generates a lot of results of the security value. It uses security risk and their associated probabilities to generate these results which are used to estimate the value of VaR.
Interest rate models
Some of the most commonly used interest rate financial models are the Black-Derman-Toy (BDT) model, Black -Karainsky (BK) model, Heath- Jarrow-Morton (HJM) model and the White-Hull model,
Black-Derman-Toy Interest Rate Model
It is mainly used for determining the value of derivatives by considering a preliminary zero rate term structure and the movement of the yield by constructing a tree explaining the interest rates. This model can also be a single-factor or multi-factor.
The Heath-Jarrow-Morton model
It uses statistical data and processes to derive the value of the derivatives by considering preliminary zero rate term structure and the up and down movement of future rates.
Hull-white model
It is a single factor that uses the preliminary term structure of interest rates with the up and down movement term structure to construct a trinomial free of short rates.
Equity pricing models
One of the widely used equity pricing model is the Capital Assets Pricing Model developed by William Sharpe and John Litner. It works on the premise that the return of a given security is affected by the risk called systematic. This risk is measured using beta () and it cannot be diversified away by holding a portfolio of securities. This model evolved from the portfolio theory which did not