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Securities Valuation

Applications of Financial Modeling

Thomas S.Y. Ho and Sang Bin Lee

Publication Date - February 2005

ISBN: 9780195172751

336 pages
7 x 10 inches

Retail Price to Students: $94.99

A Clear, Concise Guide.


Securities Valuation: Applications of Financial Modeling is a clear, concise guide to securities valuation and the principles of financial theory. It describes state-of-the-art methods for valuing a broad range of securities: equity, equity and interest rate options, swaps and swaptions, treasuries, corporate bonds with and without credit risks, mortgage-backed securities, collateralized mortgage obligations, credit derivative swaps, and more.

Thomas Ho and Sang Bin Lee use their combined fifty years of experience in academia, financial business, and public services to present students and general readers with twenty-six challenging cases. These cases describe the contexts in which financial models are used, the practical complications of these models, and ways to deal with their limitations.

Each chapter begins with a problem in valuation, formulates models for it, and then provides the solutions. The assumptions, input data, and output solutions for each model are clearly stated. The model is illustrated by a numerical example rendered in Excel. A companion website-www.thomasho.com-contains more than 130 Excel files of all the financial models from this book and its three companion volumes. Users can download the models, analyze them on their spreadsheets, and use them to do practice exercises

Securities Valuation: Applications of Financial Modeling is ideal for undergraduate and graduate courses in finance and mathematical finance as well as for professional training programs. It is part of a series on financial modeling by the authors that also includes The Oxford Guide to Financial Modeling. Future titles in the series will focus on financial modeling for options, futures, and derivatives and financial modeling for financial institutions.

About the Author(s)

Thomas S.Y. Ho is the President of the Thomas Ho Company, Ltd. He is the founder/CEO of Global Advanced Technology and a former professor of finance at the Stern School of Business, New York University.

Sang Bin Lee is Professor of Finance at Hanyang University in Korea and a Commissioner of the Korean SEC. He was president of the Korean Securities Association and an independent director and member of the risk management committee at Hana Bank in Korea.


"The Oxford Guide to Financial Modeling, and its companion volume, Securities Valuation, are invaluable tools for understanding and developing financial models to solve real business problems. They blend cutting-edge financial theory with practical examples that are immediately useful. This approach enables the student and practitioner to develop the thinking processes needed to formulate and solve a broad range of contemporary financial problems. The Guide has been exceedingly useful in my own work." --Dr. Robert Carow, Director of Corporate Compensation, AIG

"This book showcases Dr. Ho's tireless journey into the frontier of finance over the years. It clearly demonstrates how various rigorous financial models can be practically incorporated into companies' strategic decision making and enterprise risk management. The book challenges our conventional thinking in capital structure theory, interest rate behavior and default risk pricing. It should provoke debate for many years to come."--Tony Kao, Managing Director of Global Fixed Income, General Motors Asset Management

"Securities Valuation provides a hands-on, yet highly analytic, approach to the valuation of securities, ranging from equities to options to fixed income securities. Ho and Lee have written a superb textbook that combines academic rigor and real-world applicability. The book is well-suited for derivatives and fixed income courses."--Hans R. Stoll, The Anne Marie and Thomas B. Walker Professor of Finance, Owen Graduate School of Management, Vanderbilt University

Table of Contents

    Each chapter ends with Excel Exercises, Notes, and a Bibliography.
    1. Introduction
    1.1. Diversification
    1.2. CAPM
    1.3. Beta Systematic Risk
    1.4. Dividend Discount Model
    1.5. An Application of the Capital Asset Pricing Model to Investment Services
    Excel Exercise 1.1. Diversification
    Case: Managing the Risk of a Pension Fund
    Excel Exercise 1.2. CAPM
    Case: Quarterly Earnings Report of an Energy Storage Operator
    Excel Exercise 1.3. Dividend Discount Model
    Case: Valuing REIT
    2. Equity Options
    2.1. Option Description
    2.2. Institutional Framework
    2.3. Put Call Parity
    2.4. The Main Insight of the Black-Scholes Model
    2.5. The Option Behavior and Sensitivity Analysis
    2.6. Applications of the Option Model
    Excel Exercise 2.1. Cox Ross Rubinstein Model
    Case: Private Wealth Management-Designing a Structured Product
    Excel Exercise 2.2. Put Call Parity
    Case: Proprietary Trading Desk
    Excel Exercise 2.3. Black-Scholes Model
    Case: Use of Put Options in Hedging
    Excel Exercise 2.4. Risk Neutral and Market Probability
    Case: Asset Allocation and the Expected Returns of an Option
    3. Exotic Options
    3.1. Options with Alternative Payoffs at Expiration
    3.2. Options with Boundary Conditions
    3.3. Early Exercise
    3.4. Compound Options
    Excel Exercise 3.1. American Stock Option
    Case: Valuing Employee Stock Options
    Excel Exercise 3.2. Compound Option
    Case: Project Financing and Compound Options
    Excel Exercise 3.3. Digital Option
    Case: IPO Incentive Option and Executive Option Design
    Excel Exercise 3.4. Greeks
    Case: Valuing an Equity Structured Product from a Term Sheet
    4. Bond Mathematics, Treasury Securities, and Swaps
    4.1. Bond Mathematics
    4.2. Bonds and Bond Markets
    4.3. Swap Markets
    4.4. Economics of the Yield Curve
    4.5. The Bond Model
    4.6. Duration and Convexity
    4.7. Applications of the Bond Analytics
    Excel Exercise 4.1. Effective Duration
    Case: Interest Rate Bet Using Effective Duration
    Excel Exercise 4.2. Par Curve and Spot Curve
    Case: Law of One Price and Marking a Bond Position
    Excel Exercise 4.3. Dollar Duration
    Case: Transfer Pricing and Hedging at the Treasury Department
    Excel Exercise 4.4. Swap
    Case: A Hedging Program Designed by the Asset Liability Committee
    5. Bond Options
    5.1. Interest Rate Movements: Historical Experiences
    5.2. Equilibrium Models
    5.3. Arbitrage-Free Models
    5.4. Key Rate Duration and Dynamic Hedging
    Excel Exercise 5.1. Cox, Ingersoll, and Ross Model
    Case: Building a Model by Knowing Your Clients
    Excel Exercise 5.2. Vasicek Model
    Case: Defined Benefits and Asset Management
    Excel Exercise 5.3. Ho-Lee Model
    Case: Using an Arbitrage-free Model to Determine the Profit Release
    Excel Exercise 5.4. Black Bond Option
    Case: Proprietary Trading Desk
    Excel Exercise 5.5. Swaption
    Case: Marking to Market an Illiquid Derivative Position
    6. Corporate Bonds-Investment Grade
    6.1. Descriptions of a Corporate Bond
    6.2. Valuation of a Bond
    6.3. Option Adjusted Spreads
    6.4. Callable Bond
    6.5. Sinking Fund Bond and Putable Bonds
    Excel Exercise 6.1. Callable Bond
    Case: Funding Working Capital with Debt
    Excel Exercise 6.2. Sinking Fund Bond
    Case: Securitization and Asset Backed Securities
    7. Corporate Bonds-High Yield Bonds
    7.1. An Example of a High Yield Bond
    7.2. Institutional Framework of Bankruptcy and Bankruptcy Proceedings
    7.3. The Fisher Model
    7.4. An Actuarial Model
    7.5. Historical Experiences and the Estimation of the Parameters of Default Models
    7.6. The Reduced Form Model
    7.7. The Structural Model
    Excel Exercise 7.1. Credit Default Swap
    Case: Credit Derivatives, Insurance Premium and Callable Bonds
    Excel Exercise 7.2. Ho-Singer Model
    Case: Reorganization and Debt Restructuring
    8. Other Bonds: Convertible Bonds, MBS, CMO
    8.1. Description of a Convertible Bond
    8.2. Forced Conversion
    8.3. Default Risk
    8.4. Mortgage-Backed Securities (Pass Through Certificates)
    8.5. Prepayment Modeling and Valuation
    8.6. Collateralized Mortgage Obligations (CMO)
    Excel Exercise 8.1. Convertible Bonds
    Case: Hedging a Convertible Bond Issue
    Excel Exercise 8.2. Mortgage-Backed Securities (Level Payment, PSA, IO & PO)
    Case: Pricing Guaranteed Investment Contract and the Profit Spread