ABSTRACT
This chapter provides an introduction to modelling – in particular, the use of financial models to help solve business problems. A model is a representation of some part of ‘reality’ but, in the context of financial modelling, the word ‘reality’ is interpreted very widely. An iconic model is a physical representation of the real system although often it is on a different scale. Symbolic models represent features of reality by symbols which can be manipulated more readily than reality. The simple cost model outlined in the last paragraph is an example of a descriptive model. The use of a given mathematical technique to determine the optimum answer to a problem entails casting the problem in a mould which is suitable for that technique. Deterministic models are models which are constructed as if the parameter values are known with absolute certainty. Spreadsheets were first developed for microcomputers and were designed to enable them to deal with multi-column, multi-period financial statements.
