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.
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.
DCF model could be the basic valuation, other valuing method, like Market Multiples should be considered to make result more accurate.
The main goal of the dividend discount model is to calculate if the present value of the stock company is overpriced or underpriced, hence, the present value of the future dividend is a good calculus. Johnson and Johnson present value of the future dividends is 100.68. On the other hand, the current value of the JNJ stock is 125.23, indicating that the current stock price is overvalued. In addition, the price per share future using the Gordon model is 64.07 indicating once again the current price of the Johnson and Johnson stock is overvalued.
1. Net present value determines the profitability of a project by finding the present value of the project’s cash flows. The net present value for Franchise L is $18.78 and $19.98 for Franchise S.
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.
It is explained within these definitions commodities are often sold in future contracts by investors, which is an agreement to buy or sell a commodity in a designated future period at a price agreed upon at the commencement of the contract by the buyer and seller. Future contracts are standardised according to the quality, quantity, delivery time and location of the commodity. A future contract differs from an option, an option gives one of the parties a right and the other an obligation to buy or sell. While a future contract represents a requirement of parties, one to deliver and the other to accept delivery. A future contract is part of a class of securities called derivatives, named because securities derive their value from the worth of an underlying investment ( Farlex 2011).
There are only two elements to determine an investment valuation using NPV approach: the difference between present value of the investment’s cash flows and the investment cost that are discounted by the risk-free rate or time value of money. The project should commence if it has a positive NPV, otherwise it should be abandoned.
One of them is the discounted cash flow model and the other being the present value model. The discounted cash flow is used to determine the value of the firm in the future, while the present value model is used to give the current value of the company using future cash flows. Apart from valuation models, we also have exchange determination techniques such as purchasing power parity (PPP). This theory is used to determine the value of one currency to another by comparing the price of a particular commodity in one country to another. (Gans, King, Stonecash, Libich, & Mankiw,
. Some of the other ways to determine cash flow from different perspectives is VCF Voyage cash flow , ACF Annual cash flow and the required freight rate analysis . Although cash flow is important in valuing a shipping company other financial statements like the income and balance statements should still be examined in determine a final valuation of the company. Another viable way to increase your accuracy in determining the intrinsic value of a shipping company is by developing a Net Asset Value Model or NAV Model. Although these models are very intensive and may require further research it gives you the liquid assets of a company, which can also help you predict what lies in the future for the company during periods of low economic activity.
The purpose of this paper is to give a clear understanding of discounted cash flow valuation. The paper will explain what a discounted cash flow valuation is and its importance in financial business decisions regarding investment strategies. This paper will give a detailed discussion about discounted valuations for both present and future multiple cash flows with respect to even and uneven schedules using clear step-by-step examples. Also included will be some advantages and disadvantages in using the discounted cash flow valuation method for corporate business. Finally, the paper will give a summary of important highlights discussed in the body of the paper.
Today financial corporate managers are continually asking, “What will today’s investment look like for the future health of the company? Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of
Theoretically, it is the foundation of simpleness and reasoning for stock valuation as any cash payoff from company is entirely in form of dividends. However, in practice, this model require further hypothesis on company’ dividend payments, future interest rate and growth pattern. Therefore, it is assumed that the DDM model merely applies to evaluate roughly minor proportion of the value of company’ share price. Specifically, the JB HI-FI value obtained from the DDM is 30.65 higher than their actual currently trading share price 24.1; a different of 6.55, and then the stock is undervalued. Consequently, DMM is not applicable for stock price valuation in case of JB HI-FI since it is not an individual approach of stock
The forward contract is an agreement between two parties about trading an underlying asset for a specific price and quantity at a specific future date. The price of the forward contract does not change at the expiration date. For instance, individual A agrees to take a short position (sell) in trading 10000 Egyptian pounds on 31st of July 2009 at $0.5 per EGP to individual B who agrees to take a long position (buy). Both individuals with short and long positions are obligated to sell or buy the underlying asset with a forward price (Hull 2003: 4).
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.
Miller, M.H. and Modigliani, F., 1961., Dividend Policy, Growth, and the Valuation of Shares. The Journal of Business, 34(4), pp. 411-433.