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:
“If there is nothing new on the earth, still the traveler always has a resource in the skies. They are constantly turning a new page to view. The wind sets the types on this blue ground, and the inquiring may always read a new truth there.”
—Henry David Thoreau (1817–1862)
“Our children evaluate themselves based on the opinions we have of them. When we use harsh words, biting comments, and a sarcastic tone of voice, we plant the seeds of self-doubt in their developing minds.... Children who receive a steady diet of these types of messages end up feeling powerless, inadequate, and unimportant. They start to believe that they are bad, and that they can never do enough.”
—Stephanie Martson (20th century)
“The rank and file have let their servants become their masters and dictators.... Provision should be made in all union constitutions for the recall of leaders. Big salaries should not be paid. Career hunters should be driven out, as well as leaders who use labor for political ends. These types are menaces to the advancement of labor.”
—Mother Jones (1830–1930)