Brainwork Consulting & ALPIQ – Monte-Carlo Simulation
Interview with Gilbert Hangartner
Tell us a little about your background
As a trained chemist, I’m used to shaping my understanding of the world with complicated mathematical models. While models don’t provide the whole truth, they must be good enough to understand the world in which we live and work.
Today, businesses must move fast to adapt to any changes, internal or external.
The first goal of financial modelling is to gain insight into the main value drivers of the business, explore all strategic options and finally, make calculated business decisions.
I started to do risk modelling on technical infrastructure, obviously using stochastic methods. But the longer I worked on it, the more I understood that the final question is always the business decision. The companies I worked for had these types of questions to answer:
- Where should one reasonably invest money in an aging water supply network to maintain the security of the water supply?
- What responsible tradeoffs should be considered for a power-plant investment, such as accepting some failures while ensuring profitability despite low spot market prices?
- Which train operation model will generate the best revenue, considering the different investment needs to provide enough rolling stock for the operations?
To answer such questions, the simplest way is to put the entire business context into a financial model and run a Monte-Carlo-Simulation on it.
The key to success is understanding the organization. Talk to people most familiar with the business, transform their ideas into the formulas and structure of the model, and then run the model to get the answer. This is an iterative process, and needs a lot of exploration and changes, but always converges to a deep understanding of the business drivers by all the stakeholders and a clear decision.
Tell us about the project you’ve been working on with ALPIQ
ALPIQ, based in Switzerland, is an energy production and trading company that works throughout Europe.
We started a business strategy project just after the energy market became more volatile. Prices went up and down, completely shifting the traditional business mechanics.
While developing a strategy on how to deal with this new reality, ALPIQ quickly understood that they needed robust financial modelling to foresee the impact of different investment strategies on revenues and risk exposure.
Although modelling cannot prevent these market risks, it can help to foresee them, and aid in developing strategies to limit the impact of the risks. Further, it can help determine new profitable business areas.
This was your first time using Quantrix. What were some of your learnings?
Before working on my current project with ALPIQ, I used different platforms for my modelling, from a custom-build Java application to Excel spreadsheets. Each platform has its strengths and weaknesses. When I started with ALPIQ, I didn’t know Quantrix, and I was a bit reluctant to use it at first. I felt it was too “financial“ and did not offer enough scientific tools for simulation. However, after working closely with the Quantrix team, we discovered that the initial impression I had was wrong, and that Quantrix was easily flexible enough to be used as a simulation engine. In any case, the simulation engine is the less complex part, the difficult task is always the finance model. This is where Quantrix could display all it’s strength and allowed us to solve the question very elegantly.
Once we had a prototype of the simulation engine running, we started the project. Now, 10 months later, I’m still amazed every day how easy it is to model the business. We are still in the strategic exploration phase, and currently have 10-20 top managers from ALPIQ modelling their business with us. Each time I’m thrilled to see how easy it is to incorporate a new element into the model. The model still calculates very efficiently and is very clear and understandable.
What benefits did you see from using Quantrix for Monte-Carlo simulation?
When doing a simulation, the first thing you always worry about is performance. Often, if a model gets too complex, you’ll hit the ceiling of capability. In other words, you discover the limits of your model. As a result, your model can spend weeks running.
But big surprise: Quantrix is extremely efficient! With the current, rather complex ALPIQ model, we complete the simulation in minutes. This is awesome. You develop inputs and scenarios for days, and when you hit the “run” button, you only have time to grab a coffee. When you come back, all the results are there.
The second big thing is versatility. Modelling is an agile exploration, not the programming of a standardized process. During the exploration phase, you will continuously improve and change, experiment with ideas and come back. Quantrix is really great with this. Keeping different parameter sets, adding scenarios, and adding a new sub-model – it’s all so easy to express.
Can you explain your MC-starter-kit?
The starter kit provides the following:
For one, it gives you the Monte-Carlo-Simulation engine (which you can reuse for every simulation project) along with some basic Risk functions to simplify the modelling process. These are small additions that were developed to ensure that MC-Simulation runs smoothly in Quantrix. Then, this technical part is applied to a very simple business case, which shows how to transform a business question into a simulation model.
You can readily play with it, and understand the value of simulation for decision making. In a couple of hours, you’ll be prepared to start your strategic simulation project. To kick-off your model development, you need to list the strategic questions for your company, and model them one by one. In doing so, you will discover how flexible and powerful Quantrix is.
Watch our Recorded Session:
Case Study Highlights:
- Quantrix is extremely efficient! With the current, rather complex ALPIQ model, we complete the simulation in minutes. This is awesome.
- You develop inputs and scenarios for days, and when you hit the “run” button, you only have time to grab a coffee. When you come back, all the results are there.
- Now, 10 months later, I’m still amazed every day how easy it is to model the business. We are still in the strategic exploration phase, and currently have 10-20 top managers from ALPIQ modelling their business with us.
- Each time I’m thrilled to see how easy it is to incorporate a new element into the model. The model still calculates very efficiently and is very clear and understandable.