Financial model

The financial model aims at computing the expected corporate value (E[CV ) which is the objective function to be maximized. The financial model and the expressions required to compute the objective function are similar to those presented in Chap. 7. The reader is directed to Sect.7.3.2 for details. 

The stochastic problem embedded in the control algorithm can be thus mathematically posed as follows  

SC denotes the set of binary variables of the model, whereas SC represents the set of continuous variables. This model considers demand as uncertain parameter, however, it can be easily extended to include other parameters uncertainty. The only change that would be required is to add the indexes I and hi to the new uncertain parameter. These indexes identify and locate the parameter inside the scenario tree. Problems considering prices and interest rates uncertainty have been dealt with in Chap. 7. 

This example was first introduced by You and Grossmann (2008) and was also utilized in Chap. 5. This case study is motivated by a real-world application concerning a polystyrene SC design. The polystyrene production process is shown in Fig. 9.3. Styrene monomers are produced from ethylene and benzene, thereafter, styrene is 

A horizon of 4 years is considered. Each year is comprised of 12 monthly planning periods. In this example, market demand is assumed as an uncertain parameter which unfolds every year. Demand can unveil into three different events leading to a scenario 

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To simplify their financial models, over the years professional investors have developed at least four categories of biotech stories. 

The most significant aspect of the book, however, is the detailed cost analysis and comparison. Each technology is evaluated in a summary table outlining-1) vendor and address. 2) waste characteristics, 3) system capacity. 4) labor and supervision requirements. 5) operating costs. 6) capital costs, 7) revenues generated, and 8) total cosis of operation on an annualized and a per unit basis. This information enables potential users to make explicit, detailed comparative assessments and to build their own financial models. The text points out areas of process or linancial uncertainty, where more research and testing are required, and new applications to be considered. 

The project should be business driven. For example, Ray Miller explains the importance of bringing value to markets—a basic but critical concept. If a project is business driven, it has a much higher probability of resulting in commercial success and in a shorter time than if it is technically driven. In general, one can assess the business driver by the existence or absence of a business plan and a financial model for the project that identifies specific applications and customers for the product(s). The business plan and financial model must be validated by repeated, critical scrutiny by successful, informed businesspeople and investors. 

It takes coaching and training to get the innovators employed in an established industrial company to write high quality business plans. The business mentality is often foreign territory to them, yet they have to write the business plans themselves. The coaches can be external trainers or internal experts from the company s new business development and financial modeling departments. Professional jury and evaluation. 

Once the items have been collected the financial analysis can be performed utilizing a financial model, such as developed by Autoclave Engineers, Inc. The capital and operating costs required include ... 

After all the appropriate costs are collected then simple profit-and-loss statements can be prepared and the outputs utilized in the financial analysis. The Autoclave Engineers financial model prepares the profit-and-loss statements and performs the financial analysis required. 

Analyze and review impact for alternatives— What are the impacts on time to market, investment cost, and product cost for each alternative Financial analysis is a key element of this step because senior management uses financials as a critical business indicator. Therefore, each alternative needs to be evaluated versus a financial model. What are the risks and tradeoffs to consider for each alternative ... 

All of the hard parameters will need to be taken into account in the financial model of the scheme which will evaluate the cashflows, in terms of costs and revenues to calculate the financial renim on the investment in the project. 

The model invariably involves many iterations before a satisfactory combination of project parameters is assembled it will set the scene for the business case which the investor or the financier will consider prior to committing funds to the project. Further discussion on the financial model is given in the section on risks and critical issues later. 

Financial model a crucial test is to see how Ae economics of a project stand up to the perceived areas of risk. The development of any project will involve Ae production of a financial model which shows how Ae sensitivities of Ae various parameters at risk affect Ae economics. This is a process which will be followed by any prospective lender in relation to a funding proposal. 

Musiela M, Rutkowski M (2004) Martingale Methods in Financial Modelling. Springer, 2nd Ed. 

We noted at the start of the chapter that the price of an option is a function of the price of the underlying stock and its behaviour over the life of the option. Therefore, this option price is determined by the variables that describe the process followed by the asset price over a continuous period of time. The behaviour of asset prices follows a stochastic process, and so option pricing models must capture the behaviour of stochastic variables behind the movement of asset prices. To accurately describe financial market processes, a financial model will depend on more than one variable. Generally, a model is constructed where a function is itself a function of more than one variable. Ito s lemma, the principal instrument in continuous time finance theory, is used to differentiate such functions. This was developed by a mathematician, Ito (1951). Here we simply state the theorem, as a proof and derivation are outside the scope of the book. Interested readers may wish to consult Briys et al. (1998) and Hull (1997) for a background on Ito s lemma we also recommend Neftci (1996). Basic background on Ito s lemma is given in Appendices B and C. 

It would appear that a number of assessment methodologies may need to be utilized, in which technical analysis is supported by both schedule and financial models, in order to deliver an optimized solution. 

Quantification of uncertainty within the overall analysis Financial model to allow for cost optimization... 

However, the vision statement still allows for a far larger set of possible features than there are developer resources available to implement. The choice of which features to include and how important they are is determined by creating models of user activities. A user activity is defined to be a more or less self-contained activity, such as writing a letter or doing a bnsiness financial model. By examining which sets of features are needed for any given user activity, a project can ensure that the set of features actually implemented will allow users to successfully complete some set of their normal activities while avoiding the provision of feature sets that only partially support various activities. 

An investor acquiring a pool of mortgt es from a lender measures the amount of associated prepayment risk by using a financial model to project the level of expected future payments. Although it is impossible to evaluate with any accuracy the prepayment potential of an individual mortgage, such analysis is reasonable for a large pool of loans. This is similar to what actuaries do when they assess the future liability of an insurer that has written personal pension contracts. The level of prepayment risk for a pool of loans is lower than that for an individual mortgt e. 

Brownian motion is a rich field in terms of the attention it has received from both physicists and mathematicians, and various models exist which incorporate other physical features. The study of Brownian motion is now being applied in fields as varied as financial modeling, protein-DNA interactions, fractal analysis in medical imaging, and estimation of floods. 

Software. Any computer, main frame or micro, requires specially written instructions before it can carry out any task. These instructions, in the form of computer programmes, are known as software. Note that any computer can run a number of different programmes which means, for example, that a microcomputer normally used for analysing accident records can also be used for word processing, financial modelling and for keeping other types of record. 

Zofnass, P. J. 2009. Making Your Firm s Balance Sheet Work for You. CE NEWS, December, pp. 23-24. (The article presents a step-by-step approach to creating and using a financial model to ensure your firm s future success. )... 

Cont, R. P. Tankov (2004). Financial modelling with jump processes. 

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