No need to hire a tour guide to visit the famous sites in Busan. Take your dinner at any restaurant near Gwanggali Beach to give you more time to marvel at the beautiful Gwanggali Bridge. You need to walk for 10 minutes before reaching the temple.
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Take a look at the table above. Clearly, the floating PSA is riskier for the consumer than the fixed PSA because, again, the consumer bears the cost of the forex and fuel risk. Or to put it simply, the consumers pay more for the fuel and forex upward adjustments. A static price comparison obviously is wrong. One cannot compare one price alone, let us say a P5. And one cannot possibly put the future prices inside the contract. This begs the question of how to account for this uncertainty in the evaluation of cost for Juan de la Cruz.
So, how can one evaluate what the real cost is for Juan de la Cruz? Common sense will tell you, the fixed price — as long as it is priced correctly — will be always be advantageous to Juan de la Cruz, all other things being equal. Mathematically it can also be proven. We still use the CAPM— the very same formula that is being used to determine the appropriateness of the tariff—except that this time, we use the CAPM from the point of view of Juan de la Cruz rather than the one of the generator.
The formula above says the discount rate of any asset is equal to the risk-free rate plus a premium. This premium is represented by the market return MR adjusted for the sensitivity of the asset to the return of the market.
Generally, in modern finance, the market return MR is defined as the return of the entire stock exchange, and the beta is the correlation coefficient of a particular stock against the return of the market. Then the beta will be ZERO.
So, the beta will be ZERO, which means the discount rate we should use will be the risk-free rate. Let me go back to this number later when we do the analysis. A simpler analogy is this: On the other hand, if the cost of fuel or forex goes down, the value of the PSA goes up becomes less expensive. Applying this logic to the CAPM, one will see that the discount rate for the fixed PSA will always be higher than the discount rate for the volatile or floating PSA mathematical proof available upon request.
The reason is simple. In the case of the fixed price contract, we discount the price at the risk-free rate. On the other hand, in the case of the floating contract, we discount the price at a rate LOWER than the risk-free rate. Discounting at this lower discount rate will result in a higher price than one that is discounted at the higher discount rate. That the mathematical truth. And any analysis that does not take this into consideration is doing a disservice to the consumers.
There is no magic in the CAPM formula. After all, anyone with some basic knowledge of calculus and finance can calculate using that formula. The major shift here is this: It is the consumer taking the fuel and forex risks. The Wall Street Journal: Top Wells Fargo retail banking exec Lisa Stevens to leave 58 mins ago. Risk Disclaimer - By using this web site you agree to its terms and conditions.
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Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite.