Xcelsius Journal

Figure 1: This is not a screen shot. This is the actual interactive Xcelsius file

A spreadsheet is good, but...

We all work with spreadsheets and other software, and often struggle with looking at the implications of relatively complicated formulas. For example, try visualizing:

=(B6*(NORMDIST(((LN(B6/B7))+((B8+(B13*B13/2))*C12))/(B13*(SQRT(C12))),0,1,TRUE)))

-(B7*(EXP(B8*C12*(-1)))*(NORMDIST(((LN(B6/B7))+((B8+(B13*B13/2))*C12))/(B13*(SQRT(C12)))-(B13*SQRT(C12)),0,1,TRUE)))

Basically, you can't. You can simplify the formula by giving names to cell coordinates, and the resulting formula might look something like:

=(s*(NORMDIST(((LN(s/x))+((rr+(sigma*sigma/2))*t))/(sigma*(SQRT(t))),0,1,TRUE)))

-(x*(EXP(rr*t*(-1)))*(NORMDIST(((LN(s/x))+((rr+(sigma*sigma/2))*t))/(sigma*(SQRT(t)))-(sigma*SQRT(t)),0,1,TRUE)))

Naming helps clarify the formula, but not enough to really understand how the formula behaves.

Clearly, formulas by themselves are not enough. Now, pull back and look at how this formula might be laid out in a typical spreadsheet (Figure 2). It is at this level that most people are used to working with spreadsheets.

Figure 2

Even here, your only way of understanding its behavior is to enter a number of different values for the stock price, strike or exercise price, risk free rate of interest, time till expiration, and the volatility. Notice there are quite a few variables you have to specify.

It is easy just to type in a new value. For example, if the Time Till Expiration is 7 months instead of 6, your call value would be 4.646 instead of 4.554. This is good, but slow and tedious. Deep insight will not come quickly if you only can adjust values one at a time.