One Period Binomial Model
As the underlying value determines the option payoff, if we know the outcome of the underlying, we know the value of the option. If the underlying is above the exercise price at expiration, then the payoff is ST – X…
European versus American Options
European options can only be exercised at the expiry date, while American options can be exercised ahead of the expiry date. This leads to some circumstances in which the pricing of the two different option types differs. American Options Early…
Principles of Revenue Recognition and Accrual Accounting
Companies disclose their revenue recognition policies in the notes to their financial statements. It is useful to review these policies to understand how and when a company recognizes revenue, especially when making comparisons with other companies. General Principles of Revenue…
Assets, Liabilities, and Equity
The balance sheet is also known as the statement of financial position or statement of financial condition. It is a financial statement that gives a snapshot of a company’s assets, and its sources of capital, i.e., liabilities and shareholder’s equity,…
Uses and Limitations of the Balance Sheet
The balance sheet can provide very useful information to users of financial statements. It, however, has several limitations. Uses of the Balance Sheet The balance sheet gives insight into a company’s financial condition at a particular point in time. It…
Calculate and Interpret Liquidity and Solvency Ratios
Ratio analysis can assist with the conduct of time-series and cross-sectional analysis of a company’s financial position. Balance sheet ratios are those ratios that involve balance sheet items only and include (i) liquidity ratios, which measure a company’s ability to…
Direct and Indirect Methods – Cash from Operating Activities
Cash flow from Operating Activities may be reported in either presentation format: the direct method and the indirect method. Both IFRS and US GAAP encourage the use of the direct method but will allow either method to be used. Under…
NPV as a Capital Budgeting Evaluation Method
Projects which have a positive NPV should, in theory, increase the value of a company as well as the value of its stock. This could help explain the popularity of NPV as a capital budgeting evaluation method. Relationship Among NPV,…
