Journal Detail

Journal 13 – Pricing

April 2005

Pricing of assets and services has come a long way since the first pricing models were developed. This issue provides you with a number of the most advanced pricing models and strategies available in the markets today.

Pricing of assets and services has come a long way since the first pricing models were developed. We now have complex models to price shares, bonds, derivatives, and any combination thereof. However, despite all these highly developed tools, the valuation of assets still remains far from being totally accurate. The reason, of course, is that there are far too many unknown variables in our models. What we hope to do in this issue of the Journal is provide you with a number of the most advanced pricing models and strategies, with the caveat that while they are the best possible tools available, they are still not totally accurate.

Of course, one of the most complex assets to price are currencies, as they involve a deep understanding of national economics and international asset and capital flows. Who better to discuss this topic with us than Prof. Robert Mundell, the recipient of the Nobel Prize in Economics in 1999, and the undisputed world authority on monetary economics. Prof. Mundell has kindly shared with us some of his views about the world of economics and currency pricing.

Unlike currency pricing, however, which has had many decades of expert time dedicated to it, the development of accurate models for pricing financial services is only in its infancy. It is quite remarkable that while we have spent billions of dollars developing tools to price complex and not so complex products, we have generally failed to address the pricing of financial services themselves. As in other industries, the correct delivery and pricing of services can be very effective in distinguishing your capabilities from those of your peers. The articles in the first section of this Journal provide some guidance on the tools available to financial services institutions.

Section two introduces a pricing model that, though available for some time now, has yet to become mainstream. The use of options pricing models to price flexibilities in all types of projects allows us to quantify behavioral decisions made by the management of most institutions. It also enables us to value the potential benefits of undertaking a negative NPV project in order to have the capability to take on a very positive NPV project in the future.

The final section looks at pricing more complex products. Consequently, it is very technical. We cover pricing models used by the most advanced thinkers in the world of finance. We appreciate that many of our readers do not deal with this aspect of the industry, but this section does provide a good overview of how we have advanced in pricing assets.