Book Image

Python for Finance - Second Edition

By : Yuxing Yan
5 (1)
Book Image

Python for Finance - Second Edition

5 (1)
By: Yuxing Yan

Overview of this book

This book uses Python as its computational tool. Since Python is free, any school or organization can download and use it. This book is organized according to various finance subjects. In other words, the first edition focuses more on Python, while the second edition is truly trying to apply Python to finance. The book starts by explaining topics exclusively related to Python. Then we deal with critical parts of Python, explaining concepts such as time value of money stock and bond evaluations, capital asset pricing model, multi-factor models, time series analysis, portfolio theory, options and futures. This book will help us to learn or review the basics of quantitative finance and apply Python to solve various problems, such as estimating IBM’s market risk, running a Fama-French 3-factor, 5-factor, or Fama-French-Carhart 4 factor model, estimating the VaR of a 5-stock portfolio, estimating the optimal portfolio, and constructing the efficient frontier for a 20-stock portfolio with real-world stock, and with Monte Carlo Simulation. Later, we will also learn how to replicate the famous Black-Scholes-Merton option model and how to price exotic options such as the average price call option.
Table of Contents (23 chapters)
Python for Finance Second Edition
Credits
About the Author
About the Reviewers
www.PacktPub.com
Customer Feedback
Preface
Index

Capital budgeting with Monte Carlo Simulation


As we mentioned at the beginning of this chapter, we can use Monte Carlo Simulation to capital budgeting when the number of variables has many different values. Our objective is to estimate the NPV for a given budget by discounting all of its future free cash flow:

Here, NPV is the Net Present Value of one proposal, FCF0 will be the free cash flow at time zero, FCFt will be free cash flow at the end of year I, R is the discount rate. The formula to calculate free cash flows at the end of year t is given here:

Here, FCTt is Free Cash Flow at year t, Dt is depreciation of year t, CaptExt is the net capital expenditure at year t, NWC is for Net working capital, which is the current asset minus current liability, Δ means change. Let's look at a simple one. Assume that the company buys one price of long term equivalent with a total cost of 0.5 million with a life of five years:

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