MSCI516 – Spreadsheet Modelling for Quantitative Finance

Individual Project 2021/22

Module Co-ordinator
Ivan Svetunkov, LUMS, Room A58a, email: i.svetunkov@lancaster.ac.uk

The tasks
You are expected to develop flexible models that would be able to provide answers even if
some parts of the initial conditions change. This should be done in Excel using VBA.

This is an individual work. Although no one can forbid you from communicating with each
other and discussing the problem, it is expected that your models and report would be
different. You should not give your spreadsheet model or report to anyone and you should
not use files of anyone else. If we notice that some files have resemblance, this will be
treated as plagiarism.

Some of the elements of the work might resemble the things discussed in the class. This
does not mean that the code can be copied and pasted (this might also be treated as
plagiarism). You are expected to either develop the code from scratch or to modify the
existing code, so that it becomes apparent that you have created a new program. Failing to
do so might flag your work as plagiarism.

The file "MSCI516CourseworkData.xlsx" contains your specific data. Use your library card
number in order to find out what the initial conditions for the tasks 1 and 2 are for you.
“MSCI516CourseworkSharesData.zip” file contains the prices of shares.

Task 1 (50%)
Company plans to start a business and they need investments. Their business is to sell robots
that can iron shirts. They expect that the project will take some pre-specified period of time,
after which they want to sell the company to Google and go on holidays. The company
contacted your boss, a Mr. Senior Financial Analyst, who came to conclusion that their
project looks similar to one of his previous projects, where a company was selling robots
ironing trousers. He has pointed out that the incomes of that company was efficiently
modelled using AR(2) process and advised the company not to take one large investment in
the beginning of the project, but to distribute it in three parts: 40%, 30% and 30%, where
each part should be given to the company in January of each year. It is possible to move
these investments a month before or a month later, but if they are moved further away
from Januaries, the project will not be complete. The project is supposed to start in January
2022. The annual interest rate used by Mr. Senior Financial Analyst is provided in the file
with the data. Estimate the project and write a brief report with analysis of the obtained
results (1000 to 1500 words).

AR(2) process can be summarised as:

y t =a0 + a1 y t −1+ a2 y t−2 +ϵ t

where a 0 is a constant term, a 1 and a 2 are parameters of the model, y t is the income in
period t and ϵ t is the error term, which has a normal distribution with zero mean and some
variance. All the parameters for the AR(2) model are provided in the
"MSCI516CourseworkData.xlsx" file.

You can use the following points as guidelines to the successful completion of the task:

1. Construct the cash flow for the project. Estimate NPV and IRR. You can use other
financial functions for additional analysis if you want.

2. Is the project profitable? What can make it profitable if it is not? Can the cash flow
be somehow altered to achieve that?

3. What about the distribution of NPV and IRR? Is it well behaved? Based on NPV, can
you say what the chance that the project will not be profitable is?

4. How will the project change if it takes one year less than planned? What if it takes
one year more than planned?

5. There may be some risks in the project and the AR(2) process has its own
randomness. Assess these risks, producing optimistic and pessimistic scenarios for
the task.

In order to answer some or all of these questions, you would need to develop a flexible
Macro that would allow replicating the situation with different scenarios several times.

Task 2 (50%)
An investment company Rebel Inc is creating a portfolio, they have an initial capital and
they want to buy some shares (see csv-files in "MSCI516CourseworkSharesData.zip" archive;
use “Close” prices). However, they also have some restrictions, because their CEO has strong
feelings about some types of shares (see "MSCI516CourseworkData.xlsx" file). They want to
increase the profitability of their portfolio, while decreasing the risks. However, they are not
100% sure about the objective function, so they also want to have an option of simply
increasing profitability and simply decreasing risks. Create the portfolio of shares and write a
brief report with the analysis of the results (1000 to 1500 words).

You can use the following points as guidelines to the successful completion of the task:

1. Formulate the task in terms of linear programming.

2. Implement the model and solve the problem.

3. Analyse the results. Do the proportions of shares in the portfolio make sense?

4. What if the risk attitude was different?

5. Generate efficient frontier and analyse it.

Make the macro as flexible as possible, allowing changes in constraints, the cost function
and the option of changing the original data.
Assessment criteria:
Each of the tasks is assessed separately. After that the weighted average is calculated and is
used as a final mark. The project carries 100% of the module assessment.

The work will be assessed on the following criteria:

1. The correctness of the implementation (is the model formulated correctly);

2. Ease of understanding of the MS Excel model (is it clear, what should be changed on
and what is fixed a sheet, is it easy to read);

3. The VBA code (efficiency, the absence of errors, the level of development etc);

4. The flexibility of the VBA model (how many elements are hard coded);

5. User interface (user forms, the readability of the model),

6. VBA best practices;

7. Analysis of the results (quality of the report);

8. The creativity in the proposed solution.

If the number of words in the report is exceeded, the mark is decreased by 10%.

Submission
You need to submit:
 The report (two sections) written in Microsoft Word or PDF file:
o the title of the report should contain the id of student,
o the report should not contain the name of student.
 Excel files with implemented models;
 MS Word or PDF file with the code of your macros (you can copy and paste it from
VBA);
 All the other files needed for running your program (if there are any).
The files must be submitted on Moodle as they are (ZIP archives are not accepted) latest by
Monday (17 January 2022) 10am.

Note that the Moodle submission system is very strict in terms of deadline. Do not wait until
the last minute to submit your work.

Do not include your name in your submission to allow blind marking – your details can
always be found on Moodle after the marking.

Plagiarism
Software to detect plagiarism will be used in marking. Standard university procedure for
plagiarism applies for any detected plagiarism attempt. It is important to cite all the sources
used in the report (such as: url, a paper, a textbook). The code is also checked for plagiarism,
so make sure that you did not “borrow” it from anywhere else.

Late submission policy

Standard departmental penalties will apply for late submission unless you have been given
an extension (by departmental coordinators) for exceptional reasons.