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Discounting [11]

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Bullet points include: Relies on: Ability to carry out perfect (static or sometimes predictable in advance dynamic) replication, and Law of One Price. Ideally deep, liquid and transparent markets: well functioning, cheap to deal in and not permitting (pure) arbitrage Highlights (mismatch) risk and minimises accounting arbitrage If aim is ‘fair’ apportionment of value between people with different interests Building blocks for discount rate selection: Selection of matching instruments used to construct discount curves Allowances for default risk, taxation, other expenses and illiquidity effects

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