Types
EEV can be "real world" or "market consistent". The former takes the best estimate for parameters that is available, whereas the latter uses a slightly constrained set of parameters which are close to best estimate, but which produce results which match market-related hedge costs.
Real-world EEV usually uses a risk discount rate made up of the risk free rate plus a risk margin which reflects the weighted average cost of capital and Beta from the CAPM model. Using company-level economic models clearly reflects a top-down approach to determining the risk discount rate.
Market-consistent EEV makes use of a bottom-up approach for determining the risk discount rate, which produces a number which equals the risk free rate plus an explicit allowance for operational risk and market risk.
Although initially there was an equal use of these two types of EEV, as time passes companies appear to be moving towards the market-consistent approach.
Read more about this topic: European Embedded Value
Famous quotes containing the word types:
“The bourgeoisie loves so-called “positive” types and novels with happy endings since they lull one into thinking that it is fine to simultaneously acquire capital and maintain one’s innocence, to be a beast and still be happy.”
—Anton Pavlovich Chekhov (1860–1904)
“The wider the range of possibilities we offer children, the more intense will be their motivations and the richer their experiences. We must widen the range of topics and goals, the types of situations we offer and their degree of structure, the kinds and combinations of resources and materials, and the possible interactions with things, peers, and adults.”
—Loris Malaguzzi (1920–1994)
“As for types like my own, obscurely motivated by the conviction that our existence was worthless if we didn’t make a turning point of it, we were assigned to the humanities, to poetry, philosophy, painting—the nursery games of humankind, which had to be left behind when the age of science began. The humanities would be called upon to choose a wallpaper for the crypt, as the end drew near.”
—Saul Bellow (b. 1915)