A. How does forward contract valuation differ from futures contract valuation?
Futures and forward contracts are viewed as derivative contracts because their values are derived from an underlying asset. The forward contract is an agreement between two parties, which are buyer and seller and they must fulfil their contractual obligations at a price established at the beginning upon the expiration date, the buyer must pay the agreed price to the seller and the seller must deliver the underlying asset to the buyer. Futures contracts have a similar definition to forward contract but futures contracts are standardized transaction.
Valuation reflects the amount of money to terminate the contract and the market Requirements to valuate these contracts when there is a default on contracts. There are some key differences in the valuations of these contracts. First of all, in case of there was a default on the forward contract, that would required the cash settlement to reduce credit exposure and forward contract risk. The forward price is equal to the spot price doubled at the favourable rate of interest at the time of the maturity date. On other words, it is the present value (PV) which equal to the future value (FV) of spot rate .So, it may traded at a premium or discount to the spot price. Moreover, that will result two position one of them will have a positive valuation, and the other will have a negative valuation. Forward contract value would be varying from market spot price through the life of the contract. On the other hand, the value of futures contract calculates as a number of contracts multiplied by size of contract which also multiplied by daily margin variation which means it not only has a futures price set at time 0 b...
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...important when calculating forward and futures contract valuation?
The most important factors when calculating forward and futures contract valuation are time value of money (present value), equities (dividends or cash flows),
During the term of the contract with a known dividend yield, an equity forward contract value at time t is equal to the present value of the difference between the price agreed to pay for the asset at time T, F (0, T), and the value of the asset which acquire under the contract at time T, less the present value of the known dividends payable. In addition, during the term of the contract, if the equities have a known cash flow that leads to equity forward contract price is equal to the spot price, less the present value of the known cash flow, added at the appropriate rate of interest for the time to maturity date.
The difference between an express contract and an implied in fact contract is the manner in which assent is manifested.
Earlier 2002, the stock price of Agnico-Eagle Mines sharply decreased by $1 finally closed at $13.89. This price has reached one of the lowest level, from the company's historical perspective. As a professional equity portfolio manager, who has a large number of AEM stocks on hand. Acker and his team are necessary to find a proper way to estimated the fair value of AEM as well as its equity. Discounted Cash Flow (DCF) has been chosen to do this job. The theory behind DCF valuation approach is that the firm's value can be estimated by using the expected future free cash flow discounted by an appropriate discounted rate (Koller etc 2005). However several assumptions need to be clearly examined within this approach. The following sections are showing the process of DCF step by step.
Valuation refers to the procedure of converting forecast into an estimation of company assets or equity value. The four available models have been used to for JB HI-FI are including the discounted dividends (DDM), discounted abnormal earnings (RIM), discounted abnormal operating earnings (ROIM) and discounted cash flow (DCF).
The two main issues in this case are the project analysis and financial forecasting. The project should be analyzed before doing the forecasting, because any recommendations on the project will affect financial forecasting for the next two years.
In Inventories are sold, and they are purchased on a continuous basis. Due to the varying market conditions, the prices of the inventories may change and as a result, valuation of inventory is imperative. There are various methods that organizations use in valuing stocks. The most common methods are:
Discounted Cash Flow Method takes the forecast free cash flows during forecasted horizon. Then we estimate the cost of capital (weighted average cost of capital) and estimate continuing value (value after forecast horizon). The future value is discounted to the present value. We than add back cash ($13 Million) and non-current assets and deduct total debt. With the information provided several assumptions had to be made to obtain reasonable values (life period of 30-years, Capital expenditures not to exceed $1 million dollars, depreciation to stay constant at $1.15 Million and a discounted rate of 10%). Based on our analysis, the company has a stand-alone value of $51 Million at the end of fiscal year end 1990 with a net present value of cash flows of $33 million that does not include the cash and non-current assets a cash of and non-current assets.
In the case of making a TCO model, also opportunity costs and present value are taken into account. Taking present value into account means; making a difference between future and past cash outlays. This way the time value of money can be considered when comparing the different alternatives. Opportunity costs finally can be described as:
Primarily, financial managers look at the market price in maximizing the value of the firm. The market value is the present value of the net cash flow divided buy the risk. Investors consider the firm’s future and present earnings, disadvantages or risks and other factors that will influence a firm prior to deciding to create an investment decision and the market price of the stock that will reflect all the information considering these factors (Arain, 2011).
Price - This is the amount of money a customer pays in order to purchase the product. Price setting, discounting, credit and cash purchases are things to think about when setting the price.
Cost can be divided into fixed and variable and by considering into fact that fixed and variable cost can be unarguably split into two, even though they behave differently based on the level of sales of volumes. Since, cost is used in every field to determine the price of an item and the unit sold. Two of the main components of cost are fixed and variable cost and is used to differentiate between the costs that have no direct correlation to business and those that do.
No one of the above financial measures is adequate for project prioritisation. Most firms use two or more of these financial measures to prioritise projects. Since economic evaluations are done using spreadsheets, there is no reason not to calculate all these financial measures, and then use the appropriate ones during project prioritisation.
A contract is an agreement between two parties in which one party agrees to perform some actions in return of some consideration. These promises are legally binding. The contract can be for exchange of goods, services, property and so on. A contract can be oral as well as written and also it can be part oral and part written but it is useful to have written contract otherwise issues can be created in future. But both the written as well as oral contract is legally enforceable. Also if there is a breach of contract, there are certain remedies for that which are discussed later in the assignment. There are certain elements which need to be present in a contract. These elements are discussed in the detail in the assignment. (Clarke,
...ting in hedging activities in the financial futures market companies are able to reduce the future risk of rising interest rates. By participating in the financial futures market companies are able to trade financial instruments now for a future date (Block & Hirt, 2005).
A contract is generally considered to be an exchange of promises or an agreement between parties which in due course legally binds the parties; this can be enforced by the English Law. A contract is always, referred to the basic foundations of Contract Law, which refers to promises being kept amongst two parties. It is clear that all people make contracts nowadays and do not even consider for a moment that they are forming contracts; these can be formal or informal, oral or written.
The difference between the actual value and market value of the relevant variables is distinguished in this method.