What is an Embedded Option? An embedded option is a provision in a financial security (typically in bonds) that provides an issuer or holder of the security a certain right but not an obligation to perform some actions at some point in the future. The embedded options exist only as a component of financial security…
What is Matrix Pricing? Matrix pricing is an estimation technique used to estimate the market price of securities that are not actively traded. Matrix pricing is primarily used in fixed income, to estimate the price of bonds that do not have an active market. The price of the bond is estimated by comparing it to…
What are Exotic Options? Exotic options are the classes of option contracts with structures and features that are different from plain-vanilla options (e.g., American or European options). Exotic options are different from regular options in their expiration dates, exercise prices, payoffs, and underlying assets. All the features make the valuation of exotic options more sophisticated…
What is a Blockage Discount? Blockage discount – also sometimes referred to as the blockage factor – is the discounted price or value the market gives stocks when a block of shares is sold. The exact number of shares constituting a block varies. However, any time more than 10,000 shares of a company’s stock are…
What is Straddle? A straddle strategy is a strategy that involves simultaneously taking a long position and a short position on a security. Consider the following example: A trader buys and sells a call option and put option at the same time for the same underlying asset at a certain point of time. Both options…
What is XVA (X-Value Adjustment)? XVA, or X-Value Adjustment, is a collective term that covers the different types of valuation adjustments relating to derivative contracts. The adjustments are made to account for the account funding, credit risk, and capital costs. When initiating new trades in the derivatives market, traders incorporate XVA into the price of…
What is Modified Book Value? Modified book value is one of the several valuation methods used by analysts and investors to assign a value to a company. The modified book value method works by adjusting the net worth of a company’s assets and liabilities to obtain their fair market value. For example, the market value…
What is the EV/Capital Employed Ratio? EV/Capital Employed Ratio is a measure of enterprise value normalized by the level of capital used by the business. For example, a large business with a large capital stock is bound to realize a large enterprise value solely due to its large capital holdings. What Does the Numerator (ROCE)…
What is Residual Income Valuation? Residual income valuation (also known as residual income model or residual income method) is an equity valuation method that is based on the idea that the value of a company’s stock equals the present value of future residual incomes discounted at the appropriate cost of equity. Further Analysis…
