Understanding mathematical models

In the scheme of things, the best or optimum solution is usually measured in monetary terms. This could be the option that generates the highest returns, the cheapest option, the option that carries an acceptable level of risk, or the most environmentally friendly option, but is usually a mixture of all these features.

Inevitably, there is inherent uncertainty in the situation, which makes it necessary to make assumptions based on past results. The most appropriate way to capture all the variables inherent in the situation or problem is to create a mathematical model. The model will establish relationships between the variables and assumptions that serve as input to the model. This model will include a series of calculations to evaluate the input information and to clarify and present the various alternatives and their consequences. This model is referred to as a financial model.