Financial Simulation Modeling in Excel

KNOWING YOUR ASSETS

Simulating pools of assets is in some ways the most treacherous of the simulation techniques we cover in the book, since very little fundamental work is done on the underlying assets. Before beginning a simulation, analysts need to have confidence that they have some qualitative knowledge of the credits in the pool in order to temper confidence in the results.

However, despite shortcomings, simulation techniques are important tools for both pool analysis and risk management. Portfolios that grow extremely large are difficult to understand, and simulation techniques offer some simple metrics that can help an analyst grasp the risks being taken. However, before implementing the techniques in this chapter, analysts need to be confident they have clean, consistent, and accurate data. In the next chapter, we will cover issues with data and some basic techniques for improving data quality.