Business Systems Applications

Finance

Using Simulation to Support Financial Engineering and Risk Management

Finance

Financial engineering focuses on the management of financial risk. It consists of the application of the mathematical tools commonly used in science and engineering to financial problems and managing treasury risk, especially the pricing and hedging of derivative instruments such as futures, swaps and options.

By combining the flexibility of a general-purpose and highly-graphical probabilistic simulation framework with specialized features to support financial modeling, GoldSim software is ideally suited as a financial engineering tool.

Portfolio

With GoldSim, you can:

  • Respresent stochastic variables and uncertainty. By its very nature, financial engineering deals with stochastic and uncertain systems. GoldSim has powerful features for representing stochastic processes and uncertain variables.
  • Represent random discrete events. In the real world, sudden events or developments can completely change the outcome of certain strategic decisions. GoldSim has the capability to represent random discrete events, such as new technological advances, lawsuits, or natural disasters, that can play a critical role in determining which financial engineering approach is most robust and effective to forecast risk.
  • Build top-down hierarchical models. GoldSim allows you to construct hierarchical multi-layer models that represent greater detail at lower levels in the model structure. As a result, you can build, explore, and explain highly complex models without losing sight of the big picture.
  • Dynamically link to external data repositories. Financial engineering simulations often require large amounts of input data. GoldSim proives the ability to link to the spreadsheets and database systems where this information is stored.
  • Create easy-to-understand presentations that effectively communicate the structure of your model and the results. The best-designed financial model probably won't be implemented if your audience doesn't understand them. GoldSim's user-friendly graphical interface provides you with the tools to communicate with and convince your audience.

Modules

White Papers

Technical Papers

  • Valuation Of A Turnover Management HRM Policy Bundle Using Monte Carlo Simulated Real Options

    Proceedings of the SimTecT 2008 Simulation Conference and Exhibition – May 2008

    David Urquhart and Debbie Richards, Macquarie University

    The field of Human Resource Management (HRM) addresses issues such as staff costs, performance and turnover – all of which have a basis in uncertainty. In this paper we employ GoldSim Monte Carlo simulated real options to determine the value of HRM policies.

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  • Dynamic Retirement Withdrawal Planning

    Financial Services Review 15, Pgs. 117–131 – Summer 2006

    R. Gene Stout and John B. Mitchell, Central Michigan University

    This paper develops a dynamic model of retirement withdrawal planning that allows retirees and financial planners to improve the probability of retirement portfolio success while simultaneously increasing the average withdrawal rate. The key elements of the model are periodic adjustments of retirement withdrawal rates based on both portfolio performance and remaining life expectancy, and Monte Carlo simulation of both investment returns and mortality. The inclusion of mortality in fixed planning horizon models reduces the probability of retirement-portfolio ruin by almost 50%. When compared to fixed withdrawal rate models, dynamic withdrawal management incorporating mortality reduces the probability of ruin by another 35–40% while increasing average lifetime withdrawal rates by nearly 50%.

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