- Joined
- 3/24/20
- Messages
- 1
- Points
- 11
Quant modeling has normally been reserved on specific securities such as a particular derivatives, bond, or structured product. More complex and quantitatively intense models cover multi-tranche structures such as CMO, CLO and CDO. In all these models, modeling the cash flow is the quintessential minimum for meaningful results.
However, I challenge all you quants to model a company in this cash flow regiment. You will quickly discover by surprise that there is no viable methodology that can model a company as whole, like in a CLO, that consistently follows the cash flow into the different tranches of the company's capital structure - debt and equity. Yes, debt and equity are treated completely separately by equity and fixed income analysts, an unimaginable state of affairs for anyone pricing a CLO or CDO deal.
Yet, if you try to get it on yourself, you will quickly find that there are good reasons why such modeling of a corporate has not been accomplished for so long. There are fundamental challenges. (First, you will quickly dismiss all the so called financial modeling that are based in Excel as not even a model at all. In fact they are just book keeping files that simply input the data instead of modeling).
1. Unlike in a securities, CLO or CDO deal, there is no documented cash flow rules for a company. Furthermore, cash in a company does not simply moves from one account to another but still as cash. Company's cash changes into debt, inventory, capacity, receivables and payables etc. In other words, to model cash in a company, one has to model all the financial and operating items that interact with cash, which essentially is the entire balance sheet of the company. This has turned a single-variable problem into a multi-variable problem which has vastly increases the intractability of complexity.
2. There is such diversity in the types of business and industries that it seems simply impossible to model company with any kind of practical generalities.
3. This is related to 1. How to find the dynamics of a company's change in balance sheet, which drives the change in income and cash flow? In bond or CLO modelings, the dynamics (or changes in cash flow) are triggered by conditions with timings defined in the debenture. But what drives the changes of a company's balance sheet.
These conceptual problems have held up the modeling of a company, but Modtris has made breakthrough in laying these lacking foundations. See attached file for an example of the power of corporate modeling. Scenario analysis is an indispensable step in any kind of securities or CLO CDO pricing before one can run a credible monte carlo algorithm.
Learn more about Modtris modeling. Details in the attached article.
However, I challenge all you quants to model a company in this cash flow regiment. You will quickly discover by surprise that there is no viable methodology that can model a company as whole, like in a CLO, that consistently follows the cash flow into the different tranches of the company's capital structure - debt and equity. Yes, debt and equity are treated completely separately by equity and fixed income analysts, an unimaginable state of affairs for anyone pricing a CLO or CDO deal.
Yet, if you try to get it on yourself, you will quickly find that there are good reasons why such modeling of a corporate has not been accomplished for so long. There are fundamental challenges. (First, you will quickly dismiss all the so called financial modeling that are based in Excel as not even a model at all. In fact they are just book keeping files that simply input the data instead of modeling).
1. Unlike in a securities, CLO or CDO deal, there is no documented cash flow rules for a company. Furthermore, cash in a company does not simply moves from one account to another but still as cash. Company's cash changes into debt, inventory, capacity, receivables and payables etc. In other words, to model cash in a company, one has to model all the financial and operating items that interact with cash, which essentially is the entire balance sheet of the company. This has turned a single-variable problem into a multi-variable problem which has vastly increases the intractability of complexity.
2. There is such diversity in the types of business and industries that it seems simply impossible to model company with any kind of practical generalities.
3. This is related to 1. How to find the dynamics of a company's change in balance sheet, which drives the change in income and cash flow? In bond or CLO modelings, the dynamics (or changes in cash flow) are triggered by conditions with timings defined in the debenture. But what drives the changes of a company's balance sheet.
These conceptual problems have held up the modeling of a company, but Modtris has made breakthrough in laying these lacking foundations. See attached file for an example of the power of corporate modeling. Scenario analysis is an indispensable step in any kind of securities or CLO CDO pricing before one can run a credible monte carlo algorithm.
Learn more about Modtris modeling. Details in the attached article.