second query Alternative investments

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second query Alternative investments

Postby deepakkrkanodia » Wed Oct 10, 2012 12:51 pm

second query Alternative investments

Postby deepakkrkanodia » Wed Oct 10, 2012 12:50 pm
mr pankaj

1. what is the difference between control discount and liquidity discount in closely held company? plz explain the difference with real example

2. Convenience yield in commodities is the benefit of holding a physical product rather than its future.Example purchasing physical bales of wheat rather than future contracts.Should there be a sudden drought and the demand for wheat increases, the difference between 1st purchase price of the wheat versus the price after drought would be convenience yield.

i want to know what is the benefit of holding physical instead of future contract, as if there will be drought and demand increases, then along with physical, future price also increases and moreover holding physical goods also carry storage cost. plz explain what is the concept behind this yield


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Re: second query Alternative investments

Postby pankaj » Tue Oct 16, 2012 3:44 pm

Control Premium is generally applied to a marketable minority
interest value. It is - the percentage by which the amount paid for a
controlling stake exceeds the amount which would have been
otherwise paid for the shares if sold as a minority interest investor.

The reasons for discounting are simple. If you own a closely held company, as a minority interest investor and your company is not traded on a public stock exchange, that is for quick sale or liquidity buyers are often not readily available, then you may qualify for a discount of your asset value.

In short:
Control Discount is paid to minority interest investors, when you want to own a closely held company as a controlling investor.
Liquidity Discount: Because closely held co.’s securities are illiquid, some discount must be made for the illiquidity to compensate investors for illiquidity in the market for shares.

Convenience yield
In case of natural calamities (such as drought, flood) as well as market interventions (such road block, strikes), the demand for commodities increase and supply decreases. In this case traders with physical stocks can charge any price they wise. And historically it has been seen that increment in price charged by traders (having physical goods) are more than the increment in the price of the future contract. And no trader will sell goods without including carrying and storage cost in the price of the goods. That is the traders sets the price as high that it can take care of all costs (including carrying and storage cost)as well as trader's extra-ordinary profit. The extra-ordinary profit is the profit over and above the normal profit.

However, this days regulatory's jumps in to regulated the prices, in case of any such events which leads to increase in demand but decrease in supply.

Hope this helps! :)

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