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Volatility adds a real time value of money on top of nominal interest rates.
by naveen99 5y ago
Volatility adds a real time value of money on top of nominal interest rates.
- pramanat 5y agocan someone explain this?
- recursivedoubts 5y agoA naive NPV calculation discounts a cash flow by a real discount rate: https://www.investopedia.com/terms/n/npv.asp https://www.investopedia.com/terms/n/npv.asp when the discount rate is 0, the NPV is simply the sum of all payments in the series, so an infinite series of payments (e.g. rental income) is worth infinity in reality, bad stuff happens: building burn down, renters leave, etc. so the right thing to do is to discount the payment stream by some risk function, particular far off payments
- 18nleung 5y agoHow does this work? (I thought volatility mainly affected the value of options, not the underlying cash flows?)
- naveen99 5y agoOptions expire and decrease in value as time passes.
- deleted 5y ago[deleted]