Principles of Financial Modeling - Coursework Example

Principles of Financial Modeling Student’s Name Institution Principles of Financial Modeling Financial modeling involves application of means that aims at utilization of statistical data validating an investment program and strategies of reducing the risks. The forecasting process considers proper planning for the future of the organization (Satchell & Knight, 2011). The modeling procedure captures performance of calculations and drawing recommendations from the findings. The economic trends may help the management to foresee the future of the business and develop criteria of overcoming the potential risks. The methods of forecasting assist in estimating the aspects of business operation and help in planning. The most significant of all before one anticipates starting a particular business, the individual, or the group has to strategize on forecasting prices (Yescombe, 2013). There exist two main ways that can be employed, and these are: the fundamental and technical analysis techniques. They are always substitutes in price forecasting. Most of the market analysts tend to use the two strategies to advise the investors. Any investor has to have in mind the two prices that are critical in the business world. These are: the price of the property currently and its future selling price. They most of the times review the past experiences to predict the future prices. They always depend on such factors to set the prices and come up with the decisions for future investment (Satchell & Knight, 2011). The people tend to avoid the products or services whose prices are falling as they perceive it will be deteriorating in the future too. The ones, whose prices shoot at once, are also seen to be due for a review and may affect them. The price predictions come with a lot of advantages. There is proper planning of all that the organization should do in order not to run into losses. The prediction helps in establishing the risks and ways of preventing or avoiding them. The established business is in a better position to quote prices expected to create profit (Taylor, 2011). All the stakeholders are aware of the needed amount to attain certain profit margins. The planning helps the organization to foresee the areas that may need adjustments before commencing the project. It helps the group to come up with the proper ways of evading possible collapse during the down economy. Measures are also put in place to propel the company to its set targets. There are demerits that the price prediction models have and include the following. First, the history cannot always be used to predict the future. The conditions keep changing and one can never assume there is a steady state of how events occur. The complex systems will tend to change with the conditions and will certainly not be the same throughout the entire period. Secondly, the researcher will not be in a position to come up with all factors or conditions that determine the end results of the study (Wu et al., 2010). There must be other new variables that are critical and may always be left out. The results of the algorithm can also undergo manipulation. Some people may take advantage of their knowledge in the algorithm and stage-manage it for their benefit. These models are complex and may in the end give an incorrect pricing. It may, thus, be fatal to the organization to invest and end up making losses. The fundamental analysis of pricing looks at the ways supply and demand directly influences the prices. The market always tries to control the prices of commodities and balances it with supply and demand in the future (Taylor, 2011). There is a tendency of uncertainty existing in the establishment of an equilibrium price by traders according to their assessment of the economic times in the future. The technique, therefore, attempts in establishing the changes in supply/demand trends and evaluates the direction together with the range of the prices that may occur in the future. Fundamental analysis may take different forms. It can be intuitive or quantitative in nature. In both cases, the method assesses the price implications of the economic factors that include supply patterns, prices of goods and the market structure. Intuitive method utilizes the economic principles to predict the changes in prices. Quantitative analysis, on the other hand, makes use of combination of the economic theory and the statistical data (Satchell & Knight, 2011). It, thus, establishes the relationship between the variables and the prices. There are many indicators used to comprehend the given market situations. The analysis can also be critical in generating short-term predictions as well. The technical analysis tries to navigate on how the organization can go through certain economic times. It majorly offers ways to price the commodities within certain price ranges. There are sophisticated calculations that often accompany it. The data is got from the history and establishing the price trends (Moons et al., 2012). The market situation is vital, and the analysis aims at reducing the opportunity cost involved in buying goods too early or selling them too late. A number of ways of analyzing the past prices exist. Some of the common indicators include the use of bar charts, key reversals, price gaps, and moving averages. Technical analysis assists one to identify a market entry and exit point. It is of significance to remember, however that the selection of the best time identifying an indicator remains elusive. The period should be long for the technical indicator to be viable. The indicators must be numerous as the decision cannot be made depending entirely on just one indicator. In case, the focus is on one indicator then the results will never be satisfactory. The number used helps in drawing a consensus among the factors. The fundamental method appears to have a better way of analysis. The model can assist in predicting the future prices better as it offers a valid base of an argument. One has to identify a time-lagged relationship between the price of the product and the economic indicator. The analyst has to infer about the expectations on the market (supply/demand) and relate it to the alterations likely to take place in the prices. The forecast for the price borrows much from the past experiences (Moons et al., 2012). In the prediction, one has to start with already known facts and projects the same in the future. For instance, those doing the analysis could look at the previous year's relationship compare it with the current year and predict the same for the following year. In both cases, an average can be got if the supply and demand standards were achieved. Many price predictors start with the already established relationship and make their alterations to achievable projections. They are, thus, in a position to tell whether the set objectives can be met or not. There are many disciplines that revolve around the financial instruments of trade. The categorization can be cash or derivative instruments. The capital instruments have their values determined by the markets directly. They can be in the form of securities that are transferable or other forms of the loans or deposits (Moons et al., 2012). Here those involved have to agree to the transfer or the transaction. On the other hand, the derivatives as their name suggest, obtain their worth from the underlying factors such as asset or interest rates. The major forms include equities, mutual funds and bonds, deposits, and cash equivalents. Equities are form of security, which is a type of the financial instrument, characterizing the possession in a company. They are frequently bought and sold in the stock exchange markets. Their purchase can also be done through an initial public offering route, which involves buying directly from the company selling them to the customers (Wu et al., 2010). The benefits, which come with them, depend on the amount of investment and the duration. The returns are high if the period is long enough than the other investment platforms. The risks are also high because of the enormous amounts commonly used in the transaction. The equity instruments are usually rated at a slightly lower value than the other issue costs. Mutual funds give room to groups of people to put their money in a pool or together for professionals to manage it for them. It is kept with the intention of starting an investment project in the future. The process is always cost-effective and has a significant risk diversification (Satchell & Knight, 2011). The professionals, who manage the funds put it into better use and do generate returns. There is also sound regulation on the funds and one can invest low amounts of money. The money can make more interests and help covering the investment costs. At times, people can as well engage in the issuance of bonds. The organization issues them to the holders and in turn they repay with substantial interests. Just like the stock it is a security. They can in turn invest it in their way to create more interests. The bondholders, thus, become creditors in the company. There are various ways that the company may benefit from the issuance of bonds as opposed to the stocks. The company may have full funding from the members as they provide financial support to the organization. The profits made are also pumped back to ensure its success. The financial analysis model proves to be superior as it allows the determination of the economic conditions that may prevail over a specified period. It looks at the various market conditions of all the potential areas of investment and directs on how the opportunity can be seized. Even after the transactions begin, the managers are in a position to control the factors that may negatively influence the newly started business (Taylor, 2011). It helps in setting out the prices that will be friendly to the clients and profitable to the organization as well. The economic performance in the banking industry can be well established through this technique. It takes a look at the various opportunities that exist and relate them in terms of profitability and the potential risks that come with it. The model also has the tendency to look keenly on the final outcomes. It places the interests of both the customers and the stakeholders in ensuring that they both benefit. It hence establishes a way through which all those involved mutually benefit in the end. The long-term solutions to the potential risks help in planning for them adequately in advance and hence it is easy to deal with any that come across (Wu et al., 2010). The process initiates the ways in which the business owner can change the prices with the economic times that exist then. They in the long run make enough profits without wasting the resources. The demand for certain goods or services has a crucial role to play especially in quoting the prices. The seller has the chance to determine how much the selling price has to be using the estimates made before commencing the transactions. The set objectives and the predetermined factors are well related as the business pick up (Moons et al., 2012). All those involved in the transactions in their capacities have the role of ensuring the success of the enterprise. The responsibilities are first outlined, and each has to master and control all their assigned areas. It facilitates the transactions that will propel the company to succeed. There is a need to employ the analysis technique because the issues of concern are well stipulated. In case, they are encountered the possible solutions are also already in place. It ensures that the organization meets its obligations to the clients and gets the profit margins needed. The activities are well planned and taken step by step (Wu et al., 2010). All those involved are in a position to tell whether the set targets are achievable or not. They hence work towards achieving the set goals. The areas, which have multiple risks, are avoided while those with high returns are seized. The commencement of any transaction goes in hand with the need to help the clients and give maximum yields. The people in the organization take a keen look at the on-goings in the world and local markets (Moons et al., 2012). The period of study can be extended to several years back and the average obtained. It helps in the implementation of the set principles that will eventually catapult the organization to a great success. The fundamental model considers the possible profit margins and the potential risks that may come with it. Most often than not, the greater the risks, the more returns that one can obtain. The establishment of how one can minimize the risks is of significance. The possible risks are to be well illustrated, and everyone notified of how to go about it. It will assist the whole group in going through the steps with much ease (Yescombe, 2013). The transaction involving the equities, for instance, has high risks. The risks are to be determined and procedure of eliminating them well illustrated. The possible risks, which come with it, could include failure of the clients to keep up their end of bargaining. It should be well set on how such clients are treated without necessarily losing them. The organization should come up with the ways of accommodating all their customers and ways to tolerate them. The organization has ways of influencing the outcome of the transactions if they put everything in place. The set rules and regulations are to be obeyed by all those involved. The process will help to curb the members, who may try to go astray. The primary goal of any business is to make a profit and if possible get as many returns as possible (Taylor, 2011). The technique assists in coming up with the necessary measures that will ensure its success. The measures could cut across from customer treatment, business transactions and ways of sustaining the mandate of the enterprise. The entire process and procedures are well set in the fundamental technique. All that remains is the implementation. At the time of its application, the entire group works as a team with a primary goal of succeeding. Among the financial instruments that are in existence, most of them have risks. The extent of risks varies, and the returns also vary a great deal. In order to come up with one that as an organization needs to invest in, the risks and returns are vital. The group needs to stipulate the range of profit margins expected and come up with a way to go through it (Yescombe, 2013). The returns always have an upper hand when it comes to considering an option to choose. As an organization, its profit ranges will be high hence the need to predict the prices. One of the most convenient is use of securities as equities. The process will ensure high returns are got if the eminent risks are under control. As an established group that needs to invest the funds, this will be the best to start with using the collected funds. The equities have the possibility of bringing enormous returns and help in going through financial constraints. The possible risks are that large sums of money are involved that requires great caution. All the invested cash may come with enormous profits as well if all goes well. The security of the invested capital should come first and defaulters heavily punished. It will ensure those taking the money use it wisely and in return bring more for investment (Moons et al., 2012). The process may end up bringing numerous benefits and continuity in the organization. The stakeholders just need to find ways of ensuring they deliver on their mandates. Customer satisfaction is paramount and should always come first in the transaction. It will help attract many more, who find it convenient to have the service. It is, therefore, significant for the stakeholders to know the existence of such organizations. In case, there are other competitors; the group should see into it that better services are offered. They should also have a lower rate of interests but to a level that will still bring the expected returns. They are in better positions of gaining access to the market and get many customers. The high number of customers will help in covering the small rates of interest and offer high profits to the company. The company may ensure high profits are got by predetermining the prevailing market conditions. They may decide to go into business when the prevailing conditions favor such business transaction. They end up making huge returns and return the initial capital. The obtained profits will now sustain the already existing enterprise (Yescombe, 2013). The group, thus, has to come up with an appropriate time frame that will assist in getting the desired objectives (Satchell & Knight, 2011). The process helps in predicting the expected time that will propel them to the acquisition of the set goals. Time is a major factor in all the processes be it production or simple transaction. One should, therefore, anticipate the duration needed to come up with the necessary resources and deadlines of achievements set. All those involving themselves have the responsibility for finding the solutions to the problems that may arise along the way. Before investing in any field, one has to predetermine if it will be safe or not. The safety depends on whether the objectives may be met with little or no risks at all. Coming up with the proposal is important and is followed by analyzing its potential benefits and risks. Those, which are potentially viable, are those with fewer risks and high profits (Moons et al., 2012). The ones with high risks may be dreadful to start as they may end up bringing losses if not well checked (Taylor, 2011). The ways of going about the problems or curbing the risks should be well understood before starting the project. The securities seem to be a better option as they may have high returns. Recovery of the initial capital is faster as the interests got cover the invested amount readily. Stakeholders are only charged with the responsibility of serving the customers and seeing into it that repayment is done on time. The extra charges levied on the clients help in the running of the organization. It is for the clients to make good use of the money given to them to generate high returns. In conclusion, the most suitable technique for establishing the price prediction is the fundamental model. It takes a look at the long-term effect and the possible ways of adjusting to the economic times then (Yescombe, 2013). It helps in going through the risks and ways to evade collapse during the down economy. The most preferred financial instrument could be the one dealing with the securities. They have high returns if the possible threats are minimized by taking appropriate measures. References Huang, B. W., Shih, M. L., Chiu, N. H., Hu, W. Y., & Chiu, C. (2009). Price information evaluation and prediction for broiler using adapted case-based reasoning approach. Expert Systems with Applications, 36(2), 1014-1019. Moons, K. G., Kengne, A. P., Grobbee, D. E., Royston, P., Vergouwe, Y., Altman, D. G., & Woodward, M. (2012). Risk prediction models: II. External validation, model updating, and impact assessment. Heart, heartjnl-2011. Satchell, S., & Knight, J. (2011). Forecasting volatility in the financial markets. Butterworth-Heinemann. Taylor, S. J. (2011). Asset price dynamics, volatility, and prediction. Princeton university press. Wu, Y., Gaunt, C., & Gray, S. (2010). A comparison of alternative bankruptcy prediction models. Journal of Contemporary Accounting & Economics, 6(1), 34-45. Yescombe, E. R. (2013). Principles of project finance. Academic Press. Read More