Also refer to the MCom + MIB Student Guide

Description

This unit investigates the role of forecasting from a finance perspective. Typically, the role of a forecaster is viewed as one of providing the best “point” estimate. However, the role of a forecaster is seen increasingly as one of identifying the uncertainty surrounding a “point” estimate. For example, most corporations want information not only on next year’s likely earnings, but also on the range of possible future earnings outcomes around the best estimate.

Finance investigates the quantification and pricing of risk. Mun (2006) links risk and uncertainty as follows: “Risk is something one bears, and is the outcome of uncertainty.” Thus, the focus of the unit is on the quantification of the uncertainty of financial variables and on the forecasting process as an input to the quantification and pricing of risk.

Topics

• Forecasting: the forecast horizon and uncertainty
• Risk: the relationship between uncertainty and risk
• Simulation methods
• Extrapolation forecasting techniques
• Prediction of uncertainty and risk
• The correlation between financial variables through time
• Valuing flexibility using a real options approach
• Management of risk