Question

How can financial modeling be utilized in investment strategies, explain the term dynamic investment strategy in the context of portfolio insurance and simulating a butterfly.

Answer 1

Financial modelling is integral to the success of companies and it acts to support a variety of strategic business decision making capabilities. Whether you are a small startup company or an enterprise, financial modelling will help organisations intelligently predict and estimate financial investments, opportunities, outcomes, risks and other scenarios.

Financial modelling can address certain business challenges such as assesing risks before making investments intelligently planning for future financial outcomes and gaining insight into specific financial scenarios. Financial modelling forecasts q business future financial performance by analyzing their historical data and past performance. This supports tactical decision making capabilities with an organization because this data can be used to amke valuable and decisive business conclusions that can greatly impact the sucess and direction ypur company takes, maximizing profitability and longstandinh industry sustainability.

There are various types of financial models that are uutilised in investment strategies.

1. Discounted cashflow model-IIt is based upon the theory that the value of a business is the sum of its expected future free cash flows, discounted at an appropriate rate

2. Camparative company analysis model- In this method we undertake a peer group analysis under which we campare the financial metrics of a company against similar firms in industry.

3. Sum of the part model- This modelling involves valuatiov of a company by determining the value of its divisions if they were broken down and spun off or tbey were acquired by another company.

4. Leverage buy out model- It involves acquiring another company usinh a significant amount of borrowed funds to meet the acquisition cost. This kind of model is being used majorly in leveraged finance at bulge bracket investment banks and sponsors like the private equity firms

5. Merger and Acquisition model- Objective is to show clients the impact of an acquisition to the acquirer's EPS and how the new EPS compares with the status quo.

6. Option pricing model- Option traders tend to utilize different option price models to set a current theoretical value.

Dynamic investment strategies provides clients access to

1. A professional ly managed portfolio.

2. Sophisticated asset allocation.

3. Rigorously vetted top tier money managers.

Portfolio isurqnce is an investment strategy where various financial instruments such as equities and debts and derivatives are combined in such a way that degradation of portfolio value is protected.

It is a dynamic heding strategy which uses stock index futures. It implies buying and selling securities perio8 in order to maintian limit of the portfolio value.