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An excellent glossary of financial jargon
is:
Rupps Insurance and Risk Management Glossary , [NILS Publishing
Co.:1999]. See www.nils.com/Rupps/
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Discounted Cash Flow
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A method for evaluating the return on a
capital investment, by calculating the present value of the income flow.
The analysis of the discounted cash flow is valuable when selecting from
competing investments, by taking into account the time value of money
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Discount Factor
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"The time value of money"
The ratio used to reduce an expected future monetary value to its
present value. Formula: 1 ÷(1+r) T, where r is some
appropriate rate expressed as a decimal and t represents the time in years
for which an amount is to be discounted.
Worry Factor
Rupp: A part of risk management analysis that assigns a monetary value
to each risk management alternative based on the uncertainty of that choice
compared to the others. The value is subjective... This worry factor is
then factored into any cash flow analysis comparing the various alternatives.
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Net Present Value (NPV)
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A financial evaluation of a business opportunity.
This can be calculated by summing up the discounted cashflows expected
over the lifetime of the opportunity.
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Internal Rate of Return (IRR)
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The annual rate of return on an investment
that makes the present value of expected cash flow from an investment equal
to the cost of the investment project, NPV=0.
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Capital
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The assets of a venture, evaluated strictly
by their monetary value.
Capital Asset
(Apparently, a tautology.)
Rupp: An asset with a useful life of more than one year that is held
for investment or used for producing income and is not consumed or sold
in the ordinary course of business. Most types of capital assets are eligible
for depreciation.
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Project Valuation
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A financial analysis of the possible outcomes
of a project which evaluates costs, risks, and rewards as quantitatively
as possible.
Hurdle Rate
Some minimum size or rate of return used to define an acceptable option.
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Depreciation
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The apparent expense that recovers the current
year's share of the decline in the value of an asset.
Straight-line Depreciation
Depreciating an asset by the same amount each year over the asset's
expected life.
Accelerated Depreciation
Depreciating an asset by larger amounts than in straight-line in the
early years of the expected lifetime. And then lesser amounts in the
later years. The attraction is larger tax deductions in the early
years.
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Amortization
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Recovering the cost of an asset over its
useful life. Or reducing a liability by making periodic payments until
it is repaid.
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Hedging
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Buying and selling a futures contract (an
option) in the direction opposite from the primary transaction to protect
against loss from price fluctuations.
A baker buys wheat to make bread. He takes out a contract to sell
wheat when he will be ready to make the dough. At that time,if the
price of wheat has fallen, he buys more wheat than he needs and resells
some of it under the higher price of the contract. The price of
his bread will also have fallen but he made money under the contract.
If the price of wheat rises and bread with it, his greater profit on the
bread will be offset by the loss incurred buying some wheat and delivering
at a lower price under the contract. Ideally, the hedging would
remove the risk of wheat prices, while retaining value-add of actually
baking the bread.
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Option
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The right to purchase or sell a stock
or commodity at a specified future time and price.
Call Option
An option to buy a stock or commodity at a predetermined price within
a specified period of time. That is, the option to call for delivery.
The option simply expires if the order cannot be executed at the call price.
This hedges against a rising price at the known risk of the contract - its
cost.
Put Option
A contract granting the holder the right to sell a stock or commodity
at a specified price on or before a certain date. That is, the option to
put out for delivery. This hedges against a falling price at the
known risk of the contract - its cost.
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Disagree with our definition? Send us yours!
This is how the language is built.
TheInnovators@Inngenuity.com
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