Computer Simulation in Financial Risk Management: A Guide for Business Planners and Strategists

By Roy L. Nersesian | Go to book overview

"Well, I got the results you requested."

"That didn't take long. How did you do it so fast?"

"The modifications weren't that significant. Then I found three personal computers that weren't being used and ran the three simulations simultaneously. The results are, in short, better, and you are on the right track of making them even better. In the one thousand runs that I made, about 200 occurrences, or 20 percent of the simulation runs, resulted in a loss when funding was done on the basis of at least two contracts being in place. That dropped down to 16 percent when funding was dependent on having three contracts in place, and another drop to 8 percent when four contracts were in place before the $20 million was advanced. This graph [exhibit 4.1] illustrates the nature of the losses. I kept the maximum loss to $30 million by assuming that you will pull the plug before losses exceed that amount."

"But why are you concerned with this when you don't intend to respond to the loan request along the lines indicated by management?"

"Oh, but I do want to respond. I do want to keep the door open. I do want to appear constructive in my attitude toward their proposal. I do want to make this loan. Management has given me their preference; I'll give them mine. There is, at this time, an unbridgeable gap between us. If no other banker responds the way they want him to, then they can start talking to me because I have given them something to respond to. I have not thrown their proposal into the wastebasket as, I hope, all my competitors have done. I'm even going to tell them about your simulation model. You're going to do a writeup on this project. We are going to tell them about the expert's assessment on their getting new contracts. I am really interested in what they have to say about his assessment. We are going to have a constructive interplay that may end up becoming a loan. But it is going to be a type of loan that won't disturb my sleep. And I have a tool where I can fool around with what year to make the loan, the amount of the loan, what conditions have to be met with both the required funding of the escrow account and the number of contracts that have to be on the books. Believe me, you are as much a part of my marketing effort as you are a part of my credit evaluation effort."


APPENDIX

The simulation in this appendix is modeled after the discussion contained in the chapter. It is a single purpose program that would have to be rewritten to be a generalized program for evaluating loan proposals. It does contain the principal provisions that would have to be incorporated into a generalized program.

SIMONE was run to generate the simulators associated with the length of the contract in good and bad times and the monthly gross margin of the contract negotiated during good and bad times. These are entered into the arrays L(1,I), L(2,I) and the arrays D(1,I), D(2,I), respectively, in statements 100 to 160. The simulation begins at statement 170 by erasing the results of previous runs (statements 180-190) and in determining whether

-117-

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Computer Simulation in Financial Risk Management: A Guide for Business Planners and Strategists
Table of contents

Table of contents

  • Title Page iii
  • Contents vii
  • Introduction ix
  • 1 - Bridging the Cultural Gap 1
  • 2 - A Businessman's Assessments 17
  • Appendix 47
  • 3 55
  • Appendix 81
  • 4 - The Loan Decision 85
  • Appendix 117
  • 5 - Self-Insuring a Loan Portfolio 123
  • Appendix 149
  • 6 - Determining the Safe Load of Debt 155
  • Appendix 193
  • 7 - Hedging and the Futures Market 199
  • Appendix 220
  • Index 223
  • About the Author 225
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