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.
(b) How is present value determined when an established exchange price is not determinable and a note has no ready market? What is the resulting interest rate often called?
The difference between an express contract and an implied in fact contract is the manner in which assent is manifested.
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.
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).
Derivatives as defined by Warren Buffet are time bombs, both for the companies that make use of them and the monetary framework. Fundamentally these instruments call for cash to change hands at a future date, with the add up to be dictated by one or more reference things, for example, premium rates, stock costs, or money values. Case in point, in the event that you are either long or short a S&P 500 prospects contract, you are a gathering to an extremely straightforward derivatives transaction, with your addition or misfortune determined from developments in the list. Derivatives contracts are of shifting length of time, running now and again to 20 or more years, and their quality is regularly attached to a few Variables.
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:
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:
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.
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).
...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.