Benninga's "Financial Modeling"

Financial Modeling, 3rd Edition, by Simon Benninga, could easily be retitled "Quant Finance 101." It's indispensable as a first text on quant finance. Let me sing its praises.

The idea of the book is to build Excel-based models in the areas of basic finance, option pricing, portfolio theory, and bond pricing. The author uses VBA and other advanced features of Excel. In this connection roughly the last 300 pages of this 1100-page book are devoted to explaining the advanced features of Excel: data tables, matrix operations, functions, array functions, arrays, and VBA (including types and loops). In brief, all the Excel a quant would probably ever need.

The book starts with a discussion of rates of return, NPV, the Gordon dividend model, calculating the weighted average cost of capital, financial statement modeling, bank valuation, and leasing. This is the first part.

The second part deals with portfolios: CAPM, minimum variance portfolios, Value at Risk, event studies, and the Black-Litterman model (this is the clearest explanation I've seen of Black-Litterman so far, and the calculations performed really drive the point home: this alone justifies the price of the book).

The third part deals with options. Note that the treatment doesn't develop the stochastic calculus required for understanding Black-Scholes: merely how to implement various pricing models. In this connection the author introduces both the binomial model, the Black-Scholes formula model, the Greeks, and (naive) Monte Carlo methods for pricing Asian and Barrier options.

And finally, the fourth part deals with calculating bond duration and convexity, immunization strategies, calculating term structure, and default adjustment.

The third edition -- which I have in my hands -- has just come out. As is usual with such books these days, it comes with its own CD (with the Excel models, macros, and VBA code). In my humble opinion this is the one book all quants and finance MBAs should have read and assimilated cover-to-cover. It is Quant Finance 101 and will serve as a sturdy and reliable foundation for more advanced and/or theoretical work.