Other > The Classroom

The models and articles in this section are valuation-related and deal with topics in finance and economics that happened to interest us at the time. The vast majority of the books and articles that we have come across that deal with mathematical finance are written at the PhD level and include little or nothing in the way of practical examples as to use of the material expounded upon. To rectify this problem we have tried to consistently apply a format where we...
1. Start with a hypothetical problem
2. Present and discuss the mathematics needed to solve the problem
3. Apply the mathematics to solve the problem
The valuation models and much of the content are original works and as such are copyrighted. The models and content are free to use but changing the name or expropriating the work as one's own is strictly prohibited. The valuation models available here are fairly simple. We do maintain an entire library of valuation models for banking, tech companies, loan guarantees, complex derivatives, etc.

Proprietary Valuation Models:

Schurman RO1C Model - Discounts for Reliance on One Customer

Schurman XGGM Model - Extended Gordon Growth Model in Continuous Time

Schurman CFESC Model - Cash Flow Model for Early Stage Companies

Schurman FLPERP Model - Giving a Perpetuity a Finite Life

Schurman MINTA Model - Minority Interests - Base Case Model

Schurman MINTB Model - Minority Interests - Incorporating a Stochastic Payout Ratio

The Schurman Vector - Modeling Stochastic Paths That Exhibit Mean Reversion

The Pizzeria at the Base of a Volcano

Modeling Fixed Assets, Depreciation Expense and Capital Expenditures Over Time

Commentary on the Valuation Models of Others:

Butler Pinkerton Total Beta Model - PDF

Butler Pinkerton Total Beta Model - Spreadsheet

The Dividend Discount Model:

The Dividend Discount Model (DDM) Derivation

Recasting The DDM as a Return Model

Retaining and Reinvesting Free Cash Flow

Adjusting Dividend Yield For Retained Free Cash Flow

The Capital Asset Pricing Model:

Part I - The Derivation of the CAPM - A Single Source of Uncertainty

Part II - The Derivation of the CAPM - Two Sources of Uncertainty

Market/Product Diversification and Cost of Capital Implications

Brownian Motion:

Part I - The Scaled Random Walk

Part II - Limiting Distribution of a Scaled Symmetric Random Walk

Part III - An Introduction to Stochastic Calculus

Jump Diffusion:

Part I - The Compound Jump Process

Part II - The Compound Jump Process and a Brownian Motion

Part III - Basic Affine Jump Diffusion Asset Pricing Model

The Mathematics of Vanilla Stock Option Valuation:

Part I - An Introduction to the Valuation Process

Part II - Valuing a One-Period Call Option Via Partial Differential Equations

Part III - Valuing a One-Period Call Option Via Risk-Neutral Probabilities

Part IV - Deriving the Black-Scholes Equation Via Partial Differential Equations

Part V - Deriving the Black-Scholes Equation Via Risk-Neutral Probabilities

Part VI - Approximating the Black-Scholes Equation Via Finite Differences

Option Value Via A Binomial Tree

The Solution to the BSOPM Integral

The Mathematics of Exotic Stock Option Valuation:

Part I - The Reflection Principle For Brownian Motion

Part II - The Joint Distribution For Brownian Motion And Its Maximum and Minimum

Part III - Pricing A Down-And-Out Call Option

Modeling Events:

The Binomial Distribution

The Correlated Binomial Distribution - Part I

The Correlated Binomial Distribution - Part II

The Exponential Distribution

The Poisson Distribution

The Gamma Function

The Gamma Distribution

The Beta Function

The Beta Distribution

The Yield Curve:

The Spot Rate Curve

The Forward Rate Curve

Bond Price and Yield To Maturity

Bond Pricing:

The Short Rate Process

The Stochastic Discount Rate

The Bond Price Equation

Vasicek Bond Price Under The Euler Discretization

Bond Duration and Convexity

Extracting the Risk-Neutral Default Intensity

Modeling Bond Prices in Continuous-Time:

Risk-Free Bond Price, Duration and Convexity

Solving For The Market Discount Rate of a Risk-Free Bond

Risky Bond Price, Duration and Convexity

Solving For The Market Discount Rate of a Risky Bond

Loan Guarantees (BVR Presentation):

Loan Guarantees - Part I: The Two State Guarantee Model

Loan Guarantees - Part II: The Revised BSOPM - Model Basics

Loan Guarantees - Part III: The Revised BSOPM - Model Calibration

Loan Guarantees - Part IV: The Revised BSOPM - Problem Solution

Loan Guarantees - Part V: The Revised BSOPM - The Greeks

Loan Guarantees - Part VI: The Revised BSOPM - PDE and Proof

Modeling and Pricing for Events:

Part I - Annualized Cash Flow

Part II - Discount Rate

Part III - Enterprise Value

Solving for Event Probability

Modeling The Business Cycle:

Part I - Cyclical Revenue

Part II - Net Income and Investment

Part III - Enterprise Value

Part IV - Debt Tax Shield Value

Mathematics Supplement

Return Models and Mean Reversion (BVR Presentation):

Part I - Discrete-Time Return Model Excluding Mean Reversion

Part II - The Stochastic, Mean-Reverting Short Rate

Part III - Continuous-Time Return Model Including Mean Reversion

Portfolio Value Equations (BVR Presentation):

Normally-Distributed Asset Values

Normally-Distributed Portfolio Value

Lognormally-Distributed Asset Values

Lognormally-Distributed Portfolio Value

Basket Options

Reconciling The Change In Portfolio Value Over Time

Risk-Neutral Pricing:

Finding the Arbitrage

Eliminating the Arbitrage

Pricing a Credit Default Swap

The Girsanov Multiplier

The Girsanov Multiplier - A Case Study

Derivative Pricing in Incomplete Markets:

Pricing Redundant Assets in a Complete Market

Minimize the Squared Replication Error

Minimize the Expected Squared Replication Error

Modeling Dividends and Other Distributions:

Part I - The Effect Of Dividends On Future Asset Price

Part II - Retaining And Reinvesting Dividends

Part III - A Case Study

Capitalizing Research and Development Expenditures:

Part I - Product Capitalized R&D in Discrete-Time

Part II - Product PV, NPV and IRR

Part III - Company Capitalized R&D Over Time

The Schurman Parabola:

A Mean-Reverting Revenue Model

A Mean-Reverting Cash Flow Model

Valuing The Debt Tax Shield

The Newton-Raphson Method of Solving Nonlinear Equations:

Solving Univariate Non-Linear Equations - Derivation and Application

Solving Univariate Non-Linear Equations - Implied Volatility

Solving Multivariate Non-Linear Equations - Derivation and Application

Solving Differential Equations in Finance and Economics:

The Integrating Factor Technique - Part I

The Integrating Factor Technique - Part II

Solving a Stochastic Differential Equation

Mathematical Series:

Polylogarithms of Order Zero

Polylogarithms of Order One

Polylogarithms of Order Two

Polylogarithms of Order Three

Polylogarithms of Order Four

The Exponential Integral:

The Exponential Integral - Derivation and Solution

The Exponential Integral - A Mean-Reverting Revenue Model

The Incomplete Gamma Function:

The Incomplete Gamma Function - Derivation and Solution

The Incomplete Gamma Function - Base Equation for a Mean-Reverting Process

The Incomplete Gamma Function - A Mean-Reverting Revenue Model

The Incomplete Gamma Function - A Mean-Reverting Return Model

Some Fun Math Stuff:

Integration By Parts - Part I: The Mathematics And A Simple Example

Integration By Parts - Part II: Weighted Average Revenue Life

The Ratio Test For Convergence - Discrete-Time Case

The Ratio Test For Convergence - Continuous-Time Case

The Taylor Series Expansion

The Practitioners Toolbox:

Valuation in Discrete and Continuous Time

Common Stock Duration and Convexity

Unlevered Beta

The Mathematics of Diversification

Univariate Ordinary Least Squares Estimator (a.k.a. Linear Regression)

Multivariate Ordinary Least Squares Estimator (a.k.a. Linear Regression)

Volatility and Discount Rate

Extracting Individual Asset Return Volatility From An Index

Using a Transition Matrix to Model Events

An Introduction to Finite Difference Methods

The Monte Carlo Toolbox:

Pulling Two Correlated Normally-Distributed Random Variates - Part I: Gaussian Copula

Pulling Two Correlated Normally-Distributed Random Variates - Part II: Gaussian Copula (continued)

Pulling Two Correlated Normally-Distributed Random Variates - Part III: Bivariate Normal Distribution

The Cholesky Decomposition - Part I

The Cholesky Decomposition - Part II

Modeling Exponential Arrival Times

Probability and Statistics:

The Calculus of the Normal Distribution

Derivatives of the Cumulative Normal Distribution Function

Standardized Normal Random Variates

The Moment Generating Function

The Mean and Variance of a Random Variate Plus/Times a Constant

The Mean and Variance of the Product of Two Normally-Distributed Random Variates

The Mean and Variance of the Exponential of a Normally-Distributed Random Variate

The Mean and Variance of the Sum of Two Normally-Distributed Random Variates

The Mean and Variance of the Product of Two Lognormally-Distributed Random Variates

The Mean and Variance of the Sum of a Normal and Exponentially-Distributed Random Variate

Approximating the Mean and Variance of the Sum of Lognormally-Distributed Random Variates

The Correlation of a Random Variate Plus a Constant with Another Random Variate

Moving the Mean of a Normal Distribution

The Triangular Distribution

The Bivariate Normal Distribution

The Gaussian Copula

The Gaussian Copula - A Case Study

The Importance Of Modeling Correlation - A Loan Guarantee Problem

Published Articles:

Valuing Loan Guarantees

A Tale of Two Betas

Auto Lease Residual Risk