Using Microsoft Excel Using Microsoft Excel Solver FunctionSolver Function

A quick review of the power A quick review of the power of Solverof Solver

What is “Solver”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 Solver is good for what-if, trend, and

other relationshipsother relationships• Using historical data Solver will try to Using historical data Solver will try to

optimize a solutionoptimize a solution• You can use Solver much like You can use Solver much like

regression analysis regression analysis

Where is Solver Where is Solver located?located?

Select SolverSelect Solver

You might need to add You might need to add Solver through Add-Solver through Add-

Ins…Ins…

Solver Dialog-boxSolver Dialog-box

What Do All Those Options What Do All Those Options Mean?Mean?

• SSeet Target Cell:t Target Cell:– This is the cell where you will have the This is the cell where you will have the

computer optimize the calculationcomputer optimize the calculation• Equate To:Equate To:

– Choice of Max, Min, or Value of… Choice of Max, Min, or Value of… (typically this is set to Min)(typically this is set to Min)

What Do All Those Options What Do All Those Options Mean?Mean?

• BBy Changing Cells:y Changing Cells:– These are the “weighting factors” These are the “weighting factors”

(Parameter Values) that the computer will (Parameter Values) that the computer will use to fit the equationuse to fit the equation

• SSuubject to the Constraints:bject to the Constraints:– You can set logical statements like A>B, You can set logical statements like A>B,

or A>0or A>0

FITDATA.XLSFITDATA.XLS

Raw Raw DataData

Model Model ValuesValues

Error Error CalculationsCalculations

Fitting Fitting TermsTerms

Solver Dialog-box: FITDATA.XLSSolver Dialog-box: FITDATA.XLSMinimize the sum Minimize the sum

of the errorsof the errors

Parameter ValuesParameter Values

Area where you are able to Area where you are able to add constraints (like A>B, add constraints (like A>B,

A>0A>0

FITDATA.XLS ExampleFITDATA.XLS Example

• Solver will try to minimize the sum of Solver will try to minimize the sum of the squares of errors (this example)the squares of errors (this example)– This means the better the fit of the This means the better the fit of the

“Parameter Values” the less error “Parameter Values” the less error introduced into the solutionintroduced into the solution

This Cell is minimizedThis Cell is minimized

And Solver does this by solving And Solver does this by solving (calculating) the target cell value as (calculating) the target cell value as small as possible buy adjusting the small as possible buy adjusting the “Parameter Values” of the Changing “Parameter Values” of the Changing Cells Cells

Enter EquationEnter Equation

Enter Equation (one you determine, or want to try)Enter Equation (one you determine, or want to try)

Then Fill Down Y_Model, Then Fill Down Y_Model, sq. error, and sq. devs. sq. error, and sq. devs. Columns (for each row Columns (for each row

you have raw data)you have raw data)

Then Verify Solver SettingsThen Verify Solver Settings

Parameters A, B, & C_ Parameters A, B, & C_ will be changed by will be changed by

SolverSolver

Settings: Minimize Settings: Minimize Sum of ErrorsSum of Errors

To minimizeTo minimize

Click Click SSolveolve

Solver will Run Yielding this Solver will Run Yielding this ResultResult

This example yielded a perfect fit, note RThis example yielded a perfect fit, note R22 & graph & graph

Compared to RegressionCompared to RegressionRegression

y = 1.0000xR2 = 1.0000

0.0000

0.5000

1.0000

1.5000

2.0000

2.5000

3.0000

3.5000

0.0000 0.5000 1.0000 1.5000 2.0000 2.5000 3.0000 3.5000

X

Y

Solver ~ RegressionSolver ~ Regression• The Two ~ MatchThe Two ~ Match• Solver can do more complex equations Solver can do more complex equations

and relationshipsand relationships

• The following example is PrepaymentsThe following example is Prepayments– Seven major terms were usedSeven major terms were used

• COFI, 30-Yr , COFI Teaser, Spread between COFI, 30-Yr , COFI Teaser, Spread between COFI & 30-Yr, Spread between COFI & COFI COFI & 30-Yr, Spread between COFI & COFI Teaser, SeasonalityTeaser, Seasonality

– Then a three month look-back for each rate was addedThen a three month look-back for each rate was added

Prepayments in SolverPrepayments in Solver

Note 16-Different X-terms mapping to 1-Y term (prepayments)!Note 16-Different X-terms mapping to 1-Y term (prepayments)!

Very Complex! But easy to do!Very Complex! But easy to do!

EmpoweredEmpowered• Now that you are empowered with the Now that you are empowered with the

Power of Excel Solver what do you Power of Excel Solver what do you want solve?want solve?