Market Value Added Analysis
Such a metric is useful for investors who wish to determine how well a company has produced value for its investors, and it can be compared against the company’s peers for a quick analysis of how well the company is operating in its industry. Economic profit can be calculated by taking a company’s net after-tax operating profit and subtracting from it the product of the company’s invested capital multiplied by its percentage cost of capital.
For example, if a fictional firm, Cory’s Tequila Company (CTC), has 2005 net after-tax operating profits of $200,000 and invested capital of $2 million at an average cost of 8. %, then CTC’s economic profit would be computed as $200,000 – ($2 million x 8. 5%) = $30,000. This $30,000 represents an amount equal to 1. 5% of CTC’s invested capital, providing a standardized measure for the wealth the company generated over and above its cost of capital during the year.
Market value added (MVA), on the other hand, is simply the difference between the current total market value of a company and the capital contributed by investors (including both shareholders and bondholders). MVA is not a performance metric like EVA, but instead is a wealth metric, measuring the level of value a company has accumulated over time.
As a company performs well over time, it will retain earnings. This will improve the book value of the company’s shares, and investors will likely bid up the prices of those shares in expectation of future earnings, causing the company’s market value to rise. As this occurs, the difference between the company’s market value and the capital contributed by investors (its MVA) represents the excess price tag the market assigns to the company as a result of it past operating successes 15.
4 – Fundamental Differences Between Futures and Forwards
The fundamental difference between futures and forwards is that futures are traded on exchanges and forwards trade OTC. The difference in trading venues gives rise to notable differences in the two instruments: * Futures are standardized instruments transacted through brokerage firms that hold a “seat” on the exchange that trades that particular contract. The terms of a futures contract – including delivery places and dates, volume, technical specifications, and trading and credit procedures – are standardized for each type of contract.
Like an ordinary stock trade, two parties will work through their respective brokers, to transact a futures trade. An investor can only trade in the futures contracts that are supported by each exchange. In contrast, forwards are entirely customized and all the terms of the contract are privately negotiated between parties.
They can be keyed to almost any conceivable underlying asset or measure. The settlement date, notional amount of the contract and settlement form (cash or physical) are entirely up to the parties to the contract. * Forwards entail both market risk and credit risk.
Those who engage in futures transactions assume exposure to default by the exchange’s clearing house. For OTC derivatives, the exposure is to default by the counterparty who may fail to perform on a forward. The profit or loss on a forward contract is only realized at the time of settlement, so the credit exposure can keep increasing.
* With futures, credit risk mitigation measures, such as regular mark-to-market and margining, are automatically required. The exchanges employ a system whereby counterparties exchange daily payments of profits or losses on the days they occur.
Through these margin payments, a futures contract’s market value is effectively reset to zero at the end of each trading day. This all but eliminates credit risk. * The daily cash flows associated with margining can skew futures prices, causing them to diverge from corresponding forward prices. * Futures are settled at the settlement price fixed on the last trading date of the contract (i.
e. at the end). Forwards are settled at the forward price agreed on at the trade date (i. e. at the start).
Futures are generally subject to a single regulatory regime in one jurisdiction, while forwards – although usually transacted by regulated firms – are transacted across jurisdictional boundaries and are primarily governed by the contractual relations between the parties. * In case of physical delivery, the forward contract specifies to whom the delivery should be made. The counterparty on a futures contract is chosen randomly by the exchange. * In a forward there are no cash flows until delivery, whereas in futures there are margin requirements and periodic margin calls.
These terms refer to two different stock-picking methodologies used for researching and forecasting the future growth trends of stocks. Like any investment strategy or philosophy, both have their advocates and adversaries.
Here are the defining principles of each of these methods of stock analysis: * Fundamental analysis is a method of evaluating securities by attempting to measure the intrinsic value of a stock. Fundamental analysts study everything from the overall economy and industry conditions to the financial condition and management of companies. Technical analysis is the evaluation of securities by means of studying statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure a security’s intrinsic value but instead use stock charts to identify patterns and trends that may suggest what a stock will do in the future. In the world of stock analysis, fundamental and technical analysis are on completely opposite sides of the spectrum. Earnings, expenses, assets and liabilities are all important characteristics to fundamental analysts, whereas technical analysts could not care less about these numbers.
Which strategy works best is always debated, and many volumes of textbooks have been written on both of these methods. So, do some reading and decide for yourself which strategy works best with your investment philosophy The concepts of support and resistance are undoubtedly two of the most highly discussed attributes of technical analysis and they are often regarded as a subject that is complex by those who are just learning to trade A support level is a price level where the price tends to find support as it is going down. This means the price is more likely to “bounce” off this level rather than break through it.
However, once the price has passed this level, by an amount exceeding some noise, it is likely to continue dropping until it finds another support level. A resistance level is the opposite of a support level. It is where the price tends to find resistance as it is going up.
This means the price is more likely to “bounce” off this level rather than break through it. However, once the price has passed this level, by an amount exceeding some noise, it is likely that it will continue rising until it finds another resistance level. Various methods of determining support and resistance exist.
The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes.
Most derivatives are characterized by high leverage. Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region.
Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes.
For example, a European investor purchasing shares of an American company off of an American exchange (using U. S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros. An indicator is anything that can be used to predict future financial or economic trends.
For example, the social and economic statistics published by accredited sources such as U. S. government departments are indicators. Popular indicators include unemployment rates, housing starts, inflationary indexes and consumer confidence. Official indicators must meet certain set criteria; there are three categories of indicators, classified according to the types of predictions they make. Leading – These types of indicators signal future events.
Think of how the amber traffic light indicates the coming of the red light.
In the world of finance, leading indicators work the same way but are less accurate than the street light. Bond yields are thought to be a good leading indicator of the stock market because bond traders anticipate and speculate trends in the economy (even though they aren’t always right). Lagging – A lagging indicator is one that follows an event. Back to our traffic light example: the amber light is a lagging indicator for the green light because amber trails green. The importance of a lagging indicator is its ability to confirm that a pattern is occurring or about to occur.
Unemployment is one of the most popular lagging indicators. If the unemployment rate is rising, it indicates that the economy has been doing poorly. Coincident – These indicators occur at approximately the same time as the conditions they signify. In our traffic light example, the green light would be a coincidental indicator of the associated pedestrian walk signal. Rather than predicting future events, these types of indicators change at the same time as the economy or stock market.
Personal income is a coincidental indicator for the economy: high personal income rates will coincide with a strong economy.