30 years: Financial markets trader

This video expands on Abdulla's previous video, What is Time Value of Money?, by introducing multiple cash flows occurring over different periods of time.

This video expands on Abdulla's previous video, What is Time Value of Money?, by introducing multiple cash flows occurring over different periods of time.

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3 mins 10 secs

Overview

Investors can use the cash discounting/compounding formula to compare two or more investment opportunities with cash flows occurring over the same time period.

Key learning objectives:

Learn how investors use the cash discounting formula to compare investments

Identify its limitations

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Summary#### How can investors use the cash discounting formula to compare investments? What are its limitations?

Investors can use the classic cash discounting/compounding formula to analyse two or more investment opportunities with cash flows occurring over the same time period using a discount rate equivalent to their required rate of return. Investment opportunities offer various rates of return and various levels of risk. Any new opportunity has to be compared with the returns on another investment with equivalent risk. The PV is a function of the discount rate and the timing of cash flows. Different rates result in different PVs. Similarly for time periods. But PV cannot be used as a comparator for the relative desirability of different investments i.e. investment A is not necessarily superior to investment B simply because it has a higher PV.

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Expert### Abdulla Javeri

Abdulla’s career in the financial markets started in 1990 when he entered the trading floor of the London International Financial Futures Exchange, LIFFE, and qualified as a pit trader in equity and equity index options. In 1996, Abdulla became a trainer for regulatory qualifications and then for non-exam courses, primarily covering all major financial products.

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