Intraday risk and Present value: Difference between pages

From ACT Wiki
(Difference between pages)
Jump to navigationJump to search
imported>Doug Williamson
(Add abbreviation.)
 
imported>Doug Williamson
(Standardise appearance of page)
 
Line 1: Line 1:
Intraday risk is a form of liquidity risk, arising within a working day.
(PV).  


It arises when payment outflows are required on a timely basis during the working day, to be made at a time before same day expected inflows have been received.
Today’s fair value of a future cash flow, calculated by discounting the future cash flow at the appropriately risk adjusted current market [[cost of capital]].




==See also==
'''Example 1'''
*[[Continuous linked settlement]]  (CLS)
*[[Double duty]]
*[[Liquidity]]
*[[Liquidity risk]]


[[Category:Financial_risk_management]]
If $110m is receivable one year from now, and the appropriate cost of capital for this level of risk (r) is 10% per year,
[[Category:Liquidity_management]]
 
the Present value is:
 
PV = $110m x 1.1<sup>-1</sup>
 
= '''$100m'''.
 
 
And more generally:
 
PV = Future value x Discount factor(DF)
 
Where:
 
DF = ( 1 + r )<sup>-n</sup>
 
:r = cost of capital per period; ''and''
:n = number of periods
 
 
'''Example 2'''
 
If $10m is receivable one year from now, and the cost of capital (r) is 6% per year,
 
the Present value is:
 
PV = $10m x 1.06<sup>-1</sup>
 
= '''$9.43m'''.
 
 
'''Example 3'''
 
Now let's change the timing from Example 2, leaving everything else the same as before.
 
If exactly the same amount of $10m is receivable, but later, namely two years from now,
 
and the cost of capital (r) is still 6% per year,
 
the Present value falls to:
 
PV = $10m x 1.06<sup>-2</sup>
 
= '''$8.90m'''.
 
 
The longer the time lag before we receive our money, the less valuable the promise is today.
 
This is reflected in the lower Present value for the two years maturity cash flow of $8.90m, compared with $9.43m Present value for the cash flow receivable after only one year's delay.
 
 
== See also ==
* [[Adjusted present value]]
* [[CertFMM]]
* [[Compounding factor]]
* [[Discount factor]]
* [[Annuity factor]]
* [[Discounted cash flow]]
* [[Future value]]
* [[Internal rate of return]]
* [[Intrinsic value]]
* [[Net present value]]
* [[Profitability index]]
* [[Terminal value]]
* [[Time value of money]]
 
[[Category:Corporate_finance]]
[[Category:Long_term_funding]]
[[Category:Manage_risks]]
[[Category:Trade_finance]]

Revision as of 17:16, 16 March 2015

(PV).

Today’s fair value of a future cash flow, calculated by discounting the future cash flow at the appropriately risk adjusted current market cost of capital.


Example 1

If $110m is receivable one year from now, and the appropriate cost of capital for this level of risk (r) is 10% per year,

the Present value is:

PV = $110m x 1.1-1

= $100m.


And more generally:

PV = Future value x Discount factor(DF)

Where:

DF = ( 1 + r )-n

r = cost of capital per period; and
n = number of periods


Example 2

If $10m is receivable one year from now, and the cost of capital (r) is 6% per year,

the Present value is:

PV = $10m x 1.06-1

= $9.43m.


Example 3

Now let's change the timing from Example 2, leaving everything else the same as before.

If exactly the same amount of $10m is receivable, but later, namely two years from now,

and the cost of capital (r) is still 6% per year,

the Present value falls to:

PV = $10m x 1.06-2

= $8.90m.


The longer the time lag before we receive our money, the less valuable the promise is today.

This is reflected in the lower Present value for the two years maturity cash flow of $8.90m, compared with $9.43m Present value for the cash flow receivable after only one year's delay.


See also