Valuation using forward rates, Financial Management

Assignment Help:

We can discount cash flows either by using spot rates or forward rates, because a spot rate is simply a package of short-term forward rates. Assume that the cash flow of period T is $1; then, the present value of the cash flow using the spot rate for period T will be as follows:

         PV of $1 in M periods = 1891_valuation using forward rate.png

We know that,

         yT = [(1 + y1) (1 + 1f1) (1 + 1f2) (1 + 1f3) ..... (1 + 1fT-1)]1/ T - 1

Adding 1 on both sides of the equations,

         (1 + yT)  = [(1 + y1) (1 + 1f1) (1 + 1f2) (1 + 1f3) ..... (1 + 1fT - 1)]1/ T

Raising both sides of the equations to the T-th power, we get:

         (1 + yT)T = [(1 + y1) (1 + 1f1) (1 + 1f2) (1 + 1f3) ..... (1 + 1fT - 1)]

The present value of X1 in M periods can be determined by substituting the value calculated in the above step into the present value formula.

         PV of X1 M periods =680_valuation using forward rate1.png

The present value of Rs.1 in T period is called the forward discount factor for period T.


Related Discussions:- Valuation using forward rates

Market beta, The management of Nelson plc wish to estimate their firm’s equ...

The management of Nelson plc wish to estimate their firm’s equity beta. Nelson has had a stock market quotation for only two months and the financial management feels that it would

Explain sunk cost and opportunity cost in npv, In the NPV analysis, sunk co...

In the NPV analysis, sunk cost is not relevant whereas opportunity cost is for project evaluation. Requirements: Explain and justify the above statement about sunk cost and

Find out eps, The financial manager of A ltd.co. expects that its EBIT in t...

The financial manager of A ltd.co. expects that its EBIT in the current year is 10,000. The firm has 5% Deb. Amounting to Rs. 40,000., while 10% Pref. Share amounts to Rs. 20,000.

Explain about cash flow statement, Q. Explain about Cash Flow Statement? ...

Q. Explain about Cash Flow Statement? Cash Flow Statement: - This is another process of cash management. A cash flow statement is the statement showing inflows as well as outfl

Can you explain about finance function, Q. Can you explain about Finance fu...

Q. Can you explain about Finance function? Finance function is the most important function of the all business function. It remains a focus of the all activity. It is not possi

What is the financial leverage effect and what causes it, What is the finan...

What is the financial leverage effect and what causes it?  What are the potential benefits and negative consequences of high financial leverage? Monetary leverage is the additi

Option-adjusted spread (oas), Option-Adjusted Spread (OAS) The prime ob...

Option-Adjusted Spread (OAS) The prime objective of an investor is to buy securities which have values greater than their market prices. The discussion made on the above valuat

Determine how you will finance your balance sheet, Project your company's i...

Project your company's income statement and assets for five years. Identify your assumptions for major categories. Determine how you will finance your balance sheet (long-term de

Commercial mortgage-backed securities (cmbs), These securities are ...

These securities are backed by income-producing real estate, usually in the form of warehouses, shopping centers, apartments, office buildings, senior housi

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd