1. Using Microsoft Excel Solver Function A quick review of the power of Solver

2. What is “Solver” Solver is a built-in function (routine)Solver is a built-in function (routine) Solver is good for what-if, trend, and other relationshipsSolver is good for what-if, trend, and other relationships Using historical data Solver will try to optimize a solutionUsing historical data Solver will try to optimize a solution You can use Solver much like regression analysisYou can use Solver much like regression analysis

3. Where is Solver located? Select Solver

4. You might need to add Solver through Add-Ins…

5. Solver Dialog-box

6. What Do All Those Options Mean? Set Target Cell:Set Target Cell: –This is the cell where you will have the computer optimize the calculation Equate To:Equate To: –Choice of Max, Min, or Value of… (typically this is set to Min)

7. What Do All Those Options Mean? By Changing Cells:By Changing Cells: –These are the “weighting factors” (Parameter Values) that the computer will use to fit the equation Subject to the Constraints:Subject to the Constraints: –You can set logical statements like A>B, or A>0

8. FITDATA.XLSFITDATA.XLS Raw Data Model Values Error Calculations Fitting Terms

9. Solver Dialog-box: FITDATA.XLS Minimize the sum of the errors Parameter Values Area where you are able to add constraints (like A>B, A>0

10. FITDATA.XLS Example Solver will try to minimize the sum of the squares of errors (this example)Solver will try to minimize the sum of the squares of errors (this example) –This means the better the fit of the “Parameter Values” the less error introduced into the solution This Cell is minimized And Solver does this by solving (calculating) the target cell value as small as possible buy adjusting the “Parameter Values” of the Changing Cells

11. Enter Equation Enter Equation (one you determine, or want to try) Then Fill Down Y_Model, sq. error, and sq. devs. Columns (for each row you have raw data)

12. Then Verify Solver Settings Parameters A, B, & C_ will be changed by Solver Settings: Minimize Sum of Errors To minimize

13. Click Solve

14. Solver will Run Yielding this Result This example yielded a perfect fit, note R 2 & graph

15. Compared to Regression

16. Solver ~ Regression The Two ~ MatchThe Two ~ Match Solver can do more complex equations and relationshipsSolver can do more complex equations and relationships The following example is PrepaymentsThe following example is Prepayments –Seven major terms were used COFI, 30-Yr, COFI Teaser, Spread between COFI & 30-Yr, Spread between COFI & COFI Teaser, SeasonalityCOFI, 30-Yr, COFI Teaser, Spread between COFI & 30-Yr, Spread between COFI & COFI Teaser, Seasonality –Then a three month look-back for each rate was added

17. Prepayments in Solver Note 16-Different X-terms mapping to 1-Y term (prepayments)! Very Complex! But easy to do!

18. EmpoweredEmpowered Now that you are empowered with the Power of Excel Solver what do you want solve?Now that you are empowered with the Power of Excel Solver what do you want solve?