The essential premise of this book is that theory and practice are equally important in describing financial modeling. In it the authors try to strike a balance in their discussions between theories that provide foundations for financial models and the institutional details that provide the context for applications of the models. The book presents the financial models of stock and bond options, exotic options, investment grade and high-yield bonds, convertible bonds, mortgage-backed securities, liabilities of financial institutions — the business model and the corporate model. It also describes the applications of the models to corporate finance. Furthermore, it relates the models to financial statements, risk management for an enterprise, and
asset/liability management with illiquid instruments. The financial models are progressively presented from option pricing in the securities markets to firm valuation in corporate finance, following a format to emphasize the three aspects of a model: the set of assumptions, the model specification, and the model applications. Generally, financial modeling books segment the world of finance as "investments," "financial institutions," "corporate finance," and "securities analysis," and in so doing they rarely emphasize the relationships between the subjects. This unique book successfully ties the thought processes and applications of the financial models together and describes them as one process that provides business solutions. Created as a companion website to the book readers can visit
www.thomasho.com to gain deeper understanding of the book's financial models. Interested readers can build and test the models described in the book using Excel, and they can submit their models to the site. Readers can also use the site's forum to discuss the models and can browse server based models to gain insights into the applications of the models. For those using the book in meetings or class settings the site provides Power Point descriptions of the chapters. Students can use available question banks on the chapters for studying.
Thomas S. Y. Ho, President, Thomas Ho Company, and Sang Bin Lee, Professor of Finance, Hanyang University
""This book showcases Dr. Ho's tireless journey into the frontier of finance over the years. It clearly demonstrates how various rigorous financial models can be practically incorporated into companies' strategic decision making and enterprise risk management. The book challenges our conventional thinking in capital structure theory, interest rate behavior and default risk pricing. It should provoke debate for many years to come." —Tony Kao, Managing Director, Global Fixed Income, General Motors Asset Management"
""If I found Ho/Lee's Oxford Guide to Financial Modeling in a bookstore, I would consider (1) the good professional reputation of the co-authors, and (2) the book's Table of Contents for a minute, and then I would buy the book. I think every other finance professor and every other finance Ph.D. student in the world will buy the book too. Oxford University Press should be proud to publish this book."—Jack Clark Francis, Baruch College"
""This book is a tour de force of finance. It is comprehensive. It is fundamental; yet it is applied. To call it a "guide to financial modeling," is an understatement. It is much more. The book develops and explains all the models used in finance - from the present value model, to the CAPM, to interest rate models, to option models - and applies these models to important business problems. The emphasis is on finance issues and how models can solve them rather than on the models alone. No work has so ably integrated the fields of corporate finance, derivatives, fixed income and accounting. The book contains many new ideas and insights, not the least of which is a new approach to enterprise valuation and risk management. Every student of finance and every financial manager will benefit
from this work."—Hans R. Stoll, The Anne Marie and Thomas B. Walker Professor of Finance, Owen Graduate School of Management, Vanderbilt University"
""I think this is a terrific book and a great project. No one has yet done anything quite like it."—Andrew Lo, MIT"
PART 1. DERIVATIVES VALUATION
1: Introduction: Discounted Cash Flow Method
2: Equity Market: the Capital Asset Pricing Model
3: Bond Markets: the Bond Model
4: Equity Options: the Black-Scholes Model
5: Interest Rate Derivatives: Interest Rate Models
6: Implied Volatility Surface: Calibrating the Models
7: Exotic Options: Bellman's Optimization, Filtration Model and n-Factor Model
PART 2. CORPORATE LIABILITIES
8: Investment Grade Corporate Bonds: the Option Adjusted Spread
9: High Yield Corporate Bonds: the Structural Models
10: Convertibles, MBS/CMO, and Other Bonds: the Behavioral Models
11: Financial Institutions' Liabilities: Required Option Adjusted Spread
PART 3. CORPORATE FINANCE
12: Valuation of a Firm: the Business Model
13: Strategic Value of a Firm: Real Option
14: Optimal Corporate Financial Decisions: Corporate Model
15: Risk Management
16: Financial Institutions: Applications of Financial Models
17: Equity Options: the Black-Scholes Model
18: Concluding Thoughts
19: Epilogue: Market Model and Binomial Lattices