Financial Management
Investing Project NPV= sum of present value of each cash inflow – initial investment There are two types for sum of present value of each cash inflow : 1.Annuity 2. Not Annuity Project decision: if NPV>0=> accept the project if NPV<0=>reject the project if NPV=0=>indifference Advantage for NPV: it regards all period of project life in calculating. it considers the time value
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In finance, the capital asset pricing model (CAPM) is a model used to determine a theoretically appropriate required rate of return of an asset, to make decisions about adding assets to a well-diversified portfolio. Overview The model takes into account the asset’s sensitivity to non-diversifiable risk (also known as systematic risk or market risk), often represented by the quantity beta
Continue reading In finance, a credit derivative refers to any one of “various instruments and techniques designed to separate and then transfer the credit risk” or the risk of an event of default of a corporate or sovereign borrower, transferring it to an entity other than the lender or debtholder. An unfunded credit derivative is one where credit protection is bought and
Continue reading In finance, the strike price (or exercise price) of an option is the fixed price at which the owner of the option can buy (in the case of a call), or sell (in the case of a put), the underlying security or commodity. The strike price may be set by reference to the spot price (market price) of the underlying
Continue reading Preferred stock (also called preferred shares, preference shares or simply preferreds) is a type of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument. Preferred stocks are senior (i.e., higher ranking) to common stock, but subordinate to bonds in
Continue reading In finance, systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to risk associated with any one individual entity, group or component of a system, that can be contained therein without harming the entire system. It can be defined as “financial system instability, potentially catastrophic, caused or exacerbated by idiosyncratic events or
Continue reading Operational risk is “the risk of a change in value caused by the fact that actual losses, incurred for inadequate or failed internal processes, people and systems, or from external events (including legal risk), differ from the expected losses”. This definition, adopted by the European union Solvency II Directive for insurers, is a variation from that adopted in the Basel
Continue reading Practitioners have advanced and regulators have accepted a financial risk management technique called value at risk (VaR), which examines the tail end of a distribution of returns for changes in exchange rates to highlight the outcomes with the worst returns. Banks in Europe have been authorized by the Bank for International Settlements to employ VaR models of their own design
Continue reading A firm’s translation exposure is the extent to which its financial reporting is affected by exchange rate movements. As all firms generally must prepare consolidated financial statements for reporting purposes, the consolidation process for multinationals entails translating foreign assets and liabilities or the financial statements of foreign subsidiaries from foreign to domestic currency. While translation exposure may not affect a
Continue reading A firm has economic exposure (also known as forecast risk) to the degree that its market value is influenced by unexpected exchange rate fluctuations. Such exchange rate adjustments can severely affect the firm’s market share position with regards to its competitors, the firm’s future cash flows, and ultimately the firm’s value. Economic exposure can affect the present value of future
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