I’d heard good things about this book from my friends – they’d remarked that this booked helped them to translate financial modelling theory into practice. But it was only when I cracked open a copy of the 3rd edition (with that wonderful new-book smell) that I began to understand why they were so enthusiastic.
I’ve read many theoretical books on financial modelling, option pricing and portfolio optimization. They’re often mathematically comprehensive and popular with academics. But they leave a gap between theory and practical application.
This is where Financial Modelling by Simon Benninga provides value. The book aim to help students and professionals
- understand financial modelling concepts,
- and develop financial models in Excel and VBA.
with the emphasis on the “modelling” part of financial modelling.
It’s a surprisingly effective approach, with theoretical concepts illustrated with practical applications. Understand abstract concepts are much easier when they’re accompanied with numerical examples.
The explanations are concise and articulately presented and easy to understand (at least to someone with a small amount of mathematical skill). Excel spreadsheets and VBA are spread liberally throughout the book.
Spreadsheet modelling has a consistent approach throughout the book. For example, you get a picture with the inputs and outputs, and the formulas used. Usually, you get some exposition of the functions used in the spreadsheet (and several alternatives, if available). Here’s a typical spreadsheet.
As an example, the section on Binomial Option Pricing offers a simple guide to the approach, with screengrabs of Excel spreadsheets at every step. There’s also VBA that how to price European and American options using binomial trees.
So what’s in the book? Well, I won’t give a comprehensive summary (that would be overwhelming) but the book has five major themes.
Part 1 explores basic financial calculations (including present value, discounted cash flows and payment schedules), capital and debt cost models, including the Gordon Dividend model. You also get case studies that use Kraft Corporation and Tyson Foods, financial statement modelling, bank valuation, leasing analysis
Part 2 discusses portfolio models (including case studies that use Walmart and Target), the Capital Asset Pricing Model, efficient portfolios, Black-Litterman asset allocation, value at risk and more
Part 3 has a comprehensive introduction to option pricing (including the binomial and Monte-Carlo methods), Greeks and more. I found the section on Monte-Carlo option pricing particularly helpful because of the practical Excel examples.
Part 4 covers bond calculations (including immunization, term structures and more). I’ve only skimmed over this section, but again it uses the same pedagogical style as the preceding chapters.
Parts 5 and 6 support the preceding chapters with topics on matrix math, Excel, VBA and a function reference. You also learn how to download financial data from Yahoo Finance with VBA. These two parts deliver a lot of value, and I learned many practical skills from this material
You also get a CD with the Excel spreadsheets and VBA macros presented in the book.
I think the best summary I can give of this book is that it makes it easy for anyone with an interest in finance and a background in math to build financial models. You don’t have don’t have to be a qualified quant to understand this book, but you could end up being a passable financial modeller when you finish it.
You can buy Financial Modelling by Benninga at Amazon by clicking on the picture on the top-left, or by clicking here (these are referral links, but this has not influenced this review).