Portfolio valuation in banks

Frequent references are made to the use of portfolio spread rates in managing financial risks in banks, but indications as to the procedures for determining such rates are very scant.The purpose of this article is to present some initial ideas on the subject: a Standard Funding system indicates what each portfolio should have earned, while an Actual Funding system points out what each portfolio did, in fact, earn; additionally, by comparing the outcomes of the two funding systems for each portfolio, it is possible to determine what each portfolio earned (or lost) in the way of arbitrage.

THE ROLE OF EARNINGS PERSISTENCE IN VALUATION ACCURACY AND THE TIME HORIZON

ABSTRACT Based on the assumption that earnings persistence has implications for both financial analysis and compensation contracts, the aim of this paper is to investigate the role of earnings persistence assuming that (i) more persistent earnings are likely to be a better input to valuation models and (ii) more persistent earnings are likely to serve as a proxy for long-term market and managerial orientation. The analysis is based on Brazilian listed firms from 1995 to 2013, and while we document strong support for the relevance of earnings persistence in financial analysis and valuation, we fail to document a significant relationship between earnings persistence and long-term value orientation. These results are sensitive to different specifications, and additional results suggest that firms' idiosyncratic risk (total risk) is relevant to explain the focus on short-term outcomes (short-termism) across firms. The main contribution of this paper is to offer empirical evidence for the relevance of accounting numbers in both valuation and contractual theories in an emergent market.

Economic optimization method to design telescope irrigation of multiples outlets

In this study is presented an economic optimization method to design telescope irrigation laterals (multidiameter) with regular spaced outlets. The proposed analytical hydraulic solution was validated by means of a pipeline composed of three different diameters. The minimum acquisition cost of the telescope pipeline was determined by an ideal arrangement of lengths and respective diameters for each one of the three segments. The mathematical optimization method based on the Lagrange multipliers provides a strategy for finding the maximum or minimum of a function subject to certain constraints. In this case, the objective function describes the acquisition cost of pipes, and the constraints are determined from hydraulic parameters as length of irrigation laterals and total head loss permitted. The developed analytical solution provides the ideal combination of each pipe segment length and respective diameter, resulting in a decreased of the acquisition cost.

Valuation models and Simon's bounded rationality

This paper aims at reconciling the evidence that sophisticated valuation models are increasingly used by companies in their investment appraisal with the literature of bounded rationality, according to which objective optimization is impracticable in the real world because it would demand an immense level of sophistication of the analytical and computational processes of human beings. We show how normative valuation models should rather be viewed as forms of reality representation, frameworks according to which the real world is perceived, fragmented for a better understanding, and recomposed, providing an orderly method for undertaking a task as complex as the investment decision.