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what is an example of deferred tax liability | a deferred tax liability usually occurs when standard company accounting rules differ from the accounting methods used by the government the depreciation of fixed assets is a common example companies typically report depreciation in their financial statements with a straight line depreciation method essentially this evenly depreciates the asset over time but for tax purposes the company will use an accelerated depreciation approach using this method the asset depreciates at a greater rate in its early years a company may record a straight line depreciation of 100 in its financial statements versus an accelerated depreciation of 200 in its tax books in turn the deferred tax liability would equal 100 multiplied by the tax rate of the company | |
how is deferred tax liability calculated | a company might sell a piece of furniture for 1 000 plus a 20 sales tax payable in monthly installments by the customer the customer will pay this over two years 500 500 in its financial records the company will record a sale of 1 000 in its tax records it will be recorded as 500 per year for two years the deferred tax liability would be 500 x 20 100 | |
what is a deficit | in financial terms a deficit occurs when expenses exceed revenues imports exceed exports or liabilities exceed assets a deficit is synonymous with a shortfall or loss and is the opposite of a surplus a deficit can occur when a government company or person spends more than it receives in a given period usually a year understanding deficitswhether the situation is personal corporate or governmental running a deficit will reduce any current surplus or add to any existing debt load for that reason many people believe that deficits are unsustainable over the long term on the other hand the famous british economist john maynard keynes maintained that fiscal deficits allow governments to purchase goods and services that can help stimulate their economy making deficits a useful tool for bringing nations out of recessions proponents of trade deficits say they allow countries to obtain more goods than they produce at least for a period of time and can also spur their domestic industries to become more competitive globally 1however opponents of trade deficits argue that they provide jobs to foreign countries instead of creating them at home hurting the domestic economy and its citizens also many argue that governments should not incur fiscal deficits regularly because the cost of servicing the debt uses up resources that the government might deploy in more productive ways such as providing education housing or public infrastructure types of government deficitsthe two primary types of deficits a nation can incur are budget deficits and trade deficits a budget deficit occurs when a government spends more in a given year than it collects in revenues such as taxes as a simple example if a government takes in 10 billion in revenue in a particular year and its expenditures for the same year are 12 billion it is running a deficit of 2 billion that deficit added to those from previous years constitutes the country s national debt a trade deficit exists when the value of a nation s imports exceeds the value of its exports for example if a country imports 3 billion in goods but only exports 2 billion worth then it has a trade deficit of 1 billion for that year in effect more money is leaving the country than is coming in which can cause a drop in the value of its currency as well as a reduction in jobs other deficit termsalong with trade and budget deficits these are some other deficit related terms you may encounter advantages and disadvantages of running a deficitdeficits are not always unintentional or the sign of a government or business that s in financial trouble businesses may deliberately run budget deficits to maximize future earnings opportunities such as retaining employees during slow months to ensure themselves of an adequate workforce in busier times also some governments run deficits to finance large public projects or maintain programs for their citizens during a recession a government may run a deficit intentionally by decreasing its sources of revenue such as taxes while maintaining or even increasing expenditures on infrastructure for example to provide jobs and income the theory is that these measures will boost the public s purchasing power and ultimately stimulate the economy but deficits also carry risks for governments the negative effects of running a deficit can include lower economic growth rates or the devaluation of the domestic currency in the corporate world running a deficit for too long a period can reduce the company s share value or even put it out of business today s federal budget deficit in the u s in may 2023 the congressional budget office cbo projected a federal budget deficit of 1 5 trillion for 2023 the cbo specified that this is subject to considerable uncertainty partly due to a shortfall in tax revenue in fact as of july 2023 the deficit has surpassed the estimate sitting at 1 6 trillion 2in terms of the national debt the cbo projected that as of the end of 2023 federal debt held by the public as opposed to the government itself will reach 98 of gdp compared with 79 at the end of 2019 for comparison purposes before the start of the great recession in 2007 it stood at 35 of gdp 2at this point the cbo also projects that debt will continue to climb hitting 102 of gdp in 2025 and 111 in 2030 2 | |
why is a deficit a problem | deficits are problems because they mean you are spending more than you re earning this applies to individuals corporations and governments deficits can result in more borrowing more interest payments and lower reinvestment which can be difficult to remedy and lead to lower savings and revenue | |
why do countries run deficits | simply put countries run deficits because they spend more than they earn and sometimes that spending is necessary countries earn income revenue through taxes they need to spend this money in many ways public infrastructure medicare and social security benefits defense salaries for government employees and so on sometimes there just isn t enough money in a year to go around so a country resorts to borrowing deficits however also allow countries to spread taxes over time by allocating taxes over generations and can lead to economic growth if managed correctly | |
which country has the worst deficit | the united states has the largest trade balance deficit in the world 1 3 trillion as of 2022 for comparison the second largest is the u k with a trade balance deficit of 294 billion 3the bottom linea deficit occurs any time expenses exceed income for personal finance it s important to manage your financial deficits ideally spending within your means and saving your money similarly large government deficits aren t ideal but sometimes necessary to fund government programs or public infrastructure | |
what is deficit spending | in the simplest terms deficit spending is when a government s expenditures exceed its revenues during a fiscal period causing it to run a budget deficit the phrase deficit spending often implies a keynesian approach to economic stimulus in which the government takes on debt while using its spending power to create demand and stimulate the economy understanding deficit spendingthe concept of deficit spending as economic stimulus is typically credited to the liberal british economist john maynard keynes in his 1936 book the general theory of employment interest and employment keynes argued that during a recession or depression a decline in consumer spending could be balanced by an increase in government spending 1to keynes maintaining aggregate demand the sum of spending by consumers businesses and the government was key to avoiding long periods of high unemployment that can worsen a recession or depression creating a downward spiral in which weakening demand causes businesses to lay off even more workers and so on once the economy is growing again and full employment is reached keynes said the government s accumulated debt could be repaid in the event that extra government spending caused excessive inflation keynes argued the government could simply raise taxes and drain extra capital out of the economy 2deficit spending and the multiplier effectkeynes believed there was a secondary benefit of government spending something known as the multiplier effect this theory suggests that 1 of government spending could increase total economic output by more than 1 the idea is that when the 1 changes hands so to speak the party on the receiving end will then go on to spend it and on and on 2while widely accepted deficit spending also has its critics particularly among the conservative chicago school of economics criticism of deficit spendingmany economists particularly conservative ones disagree with keynes those from the chicago school of economics who oppose what they describe as government interference in the economy argue that deficit spending won t have the intended psychological effect on consumers and investors because people know that it is short term and ultimately will need to be offset with higher taxes and interest rates this view dates to 19th century british economist david ricardo who argued that because people know the deficit spending must eventually be repaid through higher taxes they will save their money instead of spending it this will deprive the economy of the fuel that deficit spending is meant to create 3some economists also say deficit spending if left unchecked could threaten economic growth too much debt could cause a government to raise taxes or even default on its debt what s more the sale of government bonds could crowd out corporate and other private issuers which might distort prices and interest rates in capital markets modern monetary theorya new school of economic thought called modern monetary theory mmt has taken up fight on behalf of keynesian deficit spending and is gaining influence particularly on the left proponents of mmt argue that as long as inflation is contained a country with its own currency doesn t need to worry about accumulating too much debt through deficit spending because it can always print more money to pay for it 4 | |
what is a deficit spending unit | a deficit spending unit is an economic term used to describe how an economy or an economic group within that economy has spent more than it has earned over a specified measurement period both companies and governments may experience a deficit spending unit understanding deficit spending unitsdeficit spenders can be individuals sectors countries or even a whole economy when a deficit spending unit is an entire country it is often forced to borrow from countries that operate as surplus spenders the effects of deficit spending if left unchecked could be a threat to economic growth it could force a government to raise taxes and potentially default on its debt when an entity spends more than they take in they may sell the debt to raise funds governments sell treasury notes and other instruments while companies may sell equity or other assets during times of economic hardship governments and municipalities are likely to run deficits to shield from the effects of a recession and to spur economic growth although it is doubtful that an economic unit will operate at a surplus all the time a prolonged deficit will eventually cause long term hardship for the economy as debt levels become too high according to keynesian economists the multiplier theory suggests that a dollar of government spending could increase total economic output by more than a dollar a multiplier in economic terms holds that a change will cause a ripple effect on other sectors of the economy keynesians believe that as the government spends it will cause an increase in the population s income in the u s households sometimes represent a deficit spending unit as these households struggle financially and do not have disposable income available as a result they may not be able to purchase additional consumer products hold money in banks or invest in the stock market without government or private assistance the opposite of a deficit spending unit is a surplus spending unit which earns more than it spends on its basic needs therefore it has money left over for investment into the economy through the form of purchasing goods investing or lending a surplus spending unit can be a household business or any other entity that makes more than it pays to sustain itself an example of a deficit spending unit is the state of illinois according to the governor s office the state s general funds budget deficit for the fiscal year 2020 is expected to be approximately 3 2 billion as of feb 8 2019 which is roughly 16 higher than the official estimate from the end of 2018 1 | |
a defined benefit plan is an employer sponsored retirement plan where employee benefits are computed using a formula that considers several factors such as length of employment and salary history usually employees are required to work for a specific amount of time before they become eligible to participate in the plan they might also require a waiting period after breaks in service | the company is responsible for managing the plan s investments and risk and will most often hire an outside investment manager to oversee the plan typically an employee cannot just withdraw funds as with a 401 k plan rather they become eligible to take their benefit as a fixed monthly payment like an annuity or in some cases as a lump sum at an age defined by the plan s rules understanding defined benefit plansalso known as pension plans or qualified benefit plans this type of plan is called defined benefit because employees and employers know the formula for calculating retirement benefits ahead of time and they use it to define and set the benefit payout this fund is different from other retirement funds like retirement savings accounts where the payout amounts depend on investment returns since the employer is responsible for making investment decisions and managing the plan s investments the employer assumes all the investment and planning risks poor investment returns or faulty assumptions and calculations can result in a funding shortfall where employers are legally obligated to make up the difference with a cash contribution examples of defined benefit plan payoutsa defined benefit plan guarantees a specific benefit or payout upon retirement the employer may opt for a fixed benefit or one calculated according to a formula that factors in years of service age and average salary the employer typically funds the plan by contributing a regular amount usually a percentage of the employee s pay into a tax deferred account however depending on the plan employees may also make contributions the employer contribution is in effect deferred compensation upon retirement the plan may pay monthly payments throughout the employee s lifetime or as a lump sum payment for example a plan for a retiree with 30 years of service at retirement may state the benefit as an exact dollar amount such as 150 per month per year of the employee s service this plan would pay the employee 4 500 per month in retirement if the employee dies some plans distribute any remaining benefits to the employee s beneficiaries selecting the right payment option is important because it can affect the benefit amount the employee receives it is best to discuss benefit options with a financial advisor | |
what is the difference between a 401 k and a defined benefit plan | a defined benefit plan such as a pension guarantees a certain benefit amount in retirement a 401 k does not as a defined contribution plan a 401 k is defined by an employee s contributions which are sometimes matched by the employer | |
what are the payout options for a defined benefit plan | payment options commonly include a single life annuity which provides a fixed monthly benefit until death a qualified joint and survivor annuity which offers a fixed monthly benefit until death and allows the surviving spouse to continue receiving benefits thereafter or a lump sum payment which pays the entire value of the plan in a single payment | |
what is one disadvantage to having a defined benefit plan | because a pension s payouts are determined by a formula if the stock market fares well employees with defined benefit plans may not benefit from the upside as much as those who have defined contribution plans such as a 401 k the bottom lineif you understand how a defined benefit plan works you can plan your retirement more strategically for example you might choose to work another year because working another year increases your benefits it increases the years of service used in the benefit formula this extra year may also increase the final salary your employer uses to calculate the benefit in addition there may be a stipulation that says working past the plan s normal retirement age automatically increases an employee s benefits | |
what is a defined contribution dc plan | a defined contribution dc plan is a retirement plan that s typically tax deferred like a 401 k or a 403 b in which employees contribute a fixed amount or a percentage of their paychecks to an account that is intended to fund their retirements in addition the sponsor company can match a portion of employee contributions as an added benefit 1these plans place restrictions that control when and how each employee can withdraw from these accounts without penalties investopedia julie bangunderstanding defined contribution dc plansthere is no way to know how much a dc plan will ultimately give the employee upon retiring as contribution levels can change and the returns on the investments may go up and down over the years dc plans accounted for 11 trillion of the 34 2 trillion in total retirement plan assets held in the united states as of dec 31 2021 according to the investment company institute ici 2 the dc plan differs from a defined benefit db plan also called a pension plan which guarantees participants receive a certain benefit at a specific future date 1dc plans take pre tax dollars and allow them to grow capital market investments tax deferred this means that income tax will ultimately be paid on withdrawals but not until retirement age a minimum of 59 years old with required minimum distributions rmds starting at age 73 34the idea is that employees earn more money and thus are subject to a higher tax bracket as full time workers and will have a lower tax bracket when they are retired furthermore the income earned inside the account is not subject to taxes until the account holder withdraws it if it s withdrawn before age 59 a 10 penalty will apply unless exceptions are met 5advantages of participating in a dc plancontributions made to a dc plan may be tax deferred until withdrawals are made in the roth 401 k the account holder makes contributions after taxes but withdrawals are tax free if certain qualifications are met 6 the tax advantaged status of dc plans generally allows balances to grow larger over time compared to accounts that are taxed every year such as the income on investments held in brokerage accounts on march 29 2022 the u s house of representatives approved the securing a strong retirement act of 2022 also known as secure act 2 0 which is designed to help people build enough funds from dc plans for retirement key provisions include mandatory automatic enrollment a later starting age for rmds increased catch up contributions and a green light for matching contributions to be paid into roth 401 k s and on student loan payments 7employer sponsored dc plans may also receive matching contributions the most common employer matching contribution is 0 50 per 1 contributed up to a specified percentage but some companies match contributions dollar for dollar up to a percentage of an employee s salary generally 4 to 6 if your employer offers matching on your contributions it is best to contribute at least the maximum amount they will match as this is essentially free money that will grow over time and will benefit you in retirement other features of dc plans include automatic participant enrollment automatic contribution increases hardship withdrawals loan provisions and catch up contributions for employees aged 50 and older 8limitations of dc plansdc plans like a 401 k account require employees to invest and manage their own money to save up enough for retirement income later in life employees may not be financially savvy or have any other experience investing in stocks bonds and other asset classes this means that some people may invest in improperly managed portfolios for instance a portfolio that includes too high of a ratio of their own company s stock rather than a well diversified portfolio of various asset class indices unlike defined benefit db pension plans which are professionally managed and guarantee retirement income for life from the employer as an annuity dc plans have no such guarantees many workers even if they have a well diversified portfolio are not putting enough away regularly and will find that they do not have enough funds to last through retirement the average american retirement savings balance across all age groups according to vanguard s latest annual study of savings in the u s 9dc plan examplesthe 401 k is perhaps most synonymous with the dc plan but many other options exist the 401 k plan is available to the employees of publicly owned companies 10 the 403 b plan is typically open to employees of nonprofit corporations such as schools 11notably 457 plans are available to employees of certain types of nonprofit businesses as well as state and municipal employees the thrift savings plan tsp is used for federal government employees while 529 plans are used to fund a child s college education since individual retirement accounts iras often entail defined contributions into tax advantaged accounts with no concrete benefits they could also be considered a dc plan | |
how is a defined contribution plan different from a defined benefit plan | with a db plan retirement income is guaranteed by the employer and computed using a formula that considers several factors such as length of employment and salary history dc plans offer no such guarantee don t have to be funded by employers and are self directed can i cash out my defined contribution pension plan it s usually necessary to keep money in the plan until you reach age 59 you may be hit with a 10 penalty on top of any income tax you may owe if you make a withdrawal before then 5 | |
how much can you contribute to a defined contribution plan | plan participants under 50 can contribute up to 22 500 a year to a 401 k in 2023 and up to 7 500 in catch up contributions if they are over age 50 12the bottom linedefined contribution plans are retirement plans where the employer employee or both make regular contributions of specified amounts many popular plans are defined contribution plans such as the 401 k 457 and 403 b plans these plans generally require the employees to choose from investment options to fit their retirement goals such as portfolios with higher returns and risk or more conservative portfolios with lower risk and returns | |
what is deflation | deflation is a general decline in prices for goods and services typically associated with a contraction in the supply of money and credit in the economy during deflation the purchasing power of currency rises over time investopedia theresa chiechiunderstanding deflationdeflation causes the nominal costs of capital labor goods and services to fall though their relative prices may be unchanged deflation has been a popular concern among economists for decades it can only be caused by a decrease in the supply of money or financial instruments redeemable in money in modern times the money supply is most influenced by central banks such as the federal reserve when the supply of money and credit falls without a corresponding decrease in economic output then the prices of all goods tend to fall periods of deflation most commonly occur after long periods of artificial monetary expansion the early 1930s was the last time significant deflation was experienced in the united states the major contributor to this deflationary period was the fall in the money supply following catastrophic bank failures 12 other nations such as japan in the 1990s experienced deflation in modern times 3on its face deflation benefits consumers because they can purchase more goods and services with the same nominal income over time not everyone wins from lower prices and economists are often concerned about the consequences of falling prices on various sectors of the economy especially in financial matters deflation particularly harms borrowers who must pay their debts with money that is worth more than when they borrowed as well as any financial market participants who invest or speculate on the prospect of rising prices causes of deflationworld renowned economist milton friedman argued that under optimal policy in which the central bank seeks a rate of deflation equal to the real interest rate on government bonds the nominal rate should be zero and the price level should fall steadily at the real rate of interest his theory birthed the friedman rule a monetary policy rule 4declining prices can be caused by other factors including a decline in aggregate demand a decrease in the total demand for goods and services and increased productivity a decline in aggregate demand typically results in subsequent lower prices causes of this shift include reduced government spending stock market failure consumer desire to increase savings and tightening monetary policies higher interest rates falling prices can also happen naturally when the output of the economy grows faster than the supply of circulating money and credit this occurs especially when technology advances the productivity of an economy and is often concentrated in goods and industries that benefit from technological improvements companies operate more efficiently as technology advances which can lead to lower production costs and cost savings transferred to consumers in the form of lower prices this is distinct from but similar to general price deflation which is a general decrease in the price level and an increase in the purchasing power of money price deflation through increased productivity is different in specific industries for example consider how increased productivity affects the technology sector in the last few decades improvements in technology have resulted in significant reductions in the average cost per gigabyte of data in 1980 the average cost of one gigabyte of data was 437 500 by 2014 the average cost was three cents 5 this reduction caused the prices of manufactured products that use this technology to also fall significantly changing views on deflation s impactfollowing the great depression when monetary deflation coincided with high unemployment and rising defaults most economists believed deflation was an adverse phenomenon thereafter most central banks adjusted monetary policy to promote consistent increases in the money supply even if it promoted chronic price inflation and encouraged debtors to borrow too much british economist john maynard keynes cautioned against deflation as he believed it contributed to the downward cycle of economic pessimism during recessions when owners of assets saw their asset prices fall and so cut back on their willingness to invest 6economist irving fisher developed an entire theory for economic depressions based on debt deflation fisher argued that the liquidation of debts after a negative economic shock can induce a larger reduction in the supply of credit in the economy which can lead to deflation which in turn puts even more pressure on debtors leading to even more liquidations and spiraling into a depression 7contemporary economists challenge the old interpretations of deflation there is a range of opinions that exist on the usefulness of deflation and price deflation including the 2004 study by economists andrew atkeson and patrick kehoe after reviewing 17 countries across a span of 180 years atkeson and kehoe found 65 out of 73 deflation episodes with no economic downturn while 21 out of 29 depressions had no deflation 8deflation changes debt and equity financingdeflation makes it less economical for governments businesses and consumers to use debt financing however deflation increases the economic power of savings based equity financing from an investor s point of view companies that accumulate large cash reserves or that have relatively little debt are more attractive under deflation the opposite is true of highly indebted businesses with little cash holdings deflation also encourages rising yields and increases the necessary risk premium on securities who is harmed by deflation debtors are particularly hurt by deflation because even as prices for goods and services fall the value of debt does not this can impact inviduals as well as larger economies including countries with high national debt | |
how do you get out of deflation | there are a variety of tools that governments and central banks like the federal reserve can use to fight deflation particularly by implementing expansionary policies those could include lowering bank reserve limits buying treasuries and lowering target interest rates other fiscal tools include increasing government spending and reducing tax rates both of which can spur spending among individuals and businesses | |
what assets do best during deflation | investors can protect their portfolios by investing in assets that perform well even in times of deflation such defensive hedges include high quality bonds companies that produce essential consumer goods and cash the bottom linedeflation is the general decline in prices of goods and services which effectively increases the value of currency it s associated with a variety of causes including a contraction in the availability of money as well as increased productivity and advancements in technology historically it was seen by economists as an adverse phenomenon but a more diverse range of opinions exists today according to the pigou effect price deflation leads to increased employment and wealth stabilizing the economy | |
what is the degree of combined leverage dcl | a degree of combined leverage dcl is a leverage ratio that summarizes the combined effect that the degree of operating leverage dol and the degree of financial leverage has on earnings per share eps given a particular change in sales this ratio can be used to help determine the most optimal level of financial and operating leverage to use in any firm the formula for the degree of combined leverage is d c l c h a n g e i n e p s c h a n g e i n s a l e s d o l x d f l where d o l degree of operating leverage d f l degree of financial leverage begin aligned dcl frac change in eps change in sales dol text x dfl textbf where dol text degree of operating leverage dfl text degree of financial leverage end aligned dcl change in sales change in eps dol x dflwhere dol degree of operating leveragedfl degree of financial leverage | |
what does the dcl tell you | this ratio summarizes the effects of combining financial and operating leverage and what effect this combination or variations of this combination has on the corporation s earnings while not all corporations use both operating and financial leverage this formula can be used if they do a firm with a relatively high level of combined leverage is seen as riskier than a firm with less combined leverage because high leverage means more fixed costs to the firm the degree of operating leverage measures the effects that operating leverage has on a company s earnings potential and indicates how earnings are affected by sales activity the degree of operating leverage is calculated by dividing the percentage change of a company s earnings before interest and taxes ebit by the percentage change of its sales over the same period the degree of financial leverage is calculated by dividing the percentage change in a company s eps by its percentage change in ebit the ratio indicates how a company s eps is affected by percentage changes in its ebit a higher degree of financial leverage indicates that the company has more volatile eps degree of combined leverage exampleas stated previously the degree of combined leverage may be calculated by multiplying the degree of operating leverage by the degree of financial leverage assume hypothetical company spacerocket had an ebit of 50 million for the current fiscal year and an ebit of 40 million for the previous fiscal year or a 25 increase year over year yoy spacerocket reported sales of 80 million for the current fiscal year and sales of 65 million for the previous fiscal year a 23 08 increase additionally spacerocket reported an eps of 2 50 for the current fiscal year and an eps of 2 for the previous fiscal year a 25 increase spacerocket thus had a degree of operating leverage of 1 08 and a degree of financial leverage of 1 consequently spacerocket had a degree of combined leverage of 1 08 for every 1 change in spacerocket s sales its eps would change by 1 08 | |
a degree of financial leverage dfl is a leverage ratio that measures the sensitivity of a company s earnings per share eps to fluctuations in its operating income as a result of changes in its capital structure the degree of financial leverage dfl measures the percentage change in eps for a unit change in operating income also known as earnings before interest and taxes ebit | this ratio indicates that the higher the degree of financial leverage the more volatile earnings will be since interest is usually a fixed expense leverage magnifies returns and eps this is good when operating income is rising but it can be a problem when operating income is under pressure 1the formula for dfl is dfl change in eps change in ebit text dfl frac text change in eps text change in ebit dfl change in ebit change in eps dfl can also be represented by the equation below dfl ebit ebit interest text dfl frac text ebit text ebit text interest dfl ebit interestebit | |
what does degree of financial leverage tell you | the higher the dfl the more volatile earnings per share eps will be dfl is invaluable in helping a company assess the amount of debt or financial leverage it should opt for in its capital structure if operating income is relatively stable then earnings and eps would be stable as well and the company can afford to take on a significant amount of debt however if the company operates in a sector where operating income is quite volatile it may be prudent to limit debt to easily manageable levels 1the use of financial leverage varies greatly by industry and by the business sector there are many industry sectors in which companies operate with a high degree of financial leverage retail stores airlines grocery stores utility companies and banking institutions are classic examples unfortunately the excessive use of financial leverage by many companies in these sectors has played a paramount role in forcing a lot of them to file for chapter 11 bankruptcy examples include r h macy 1992 trans world airlines 2001 great atlantic pacific tea co a p 2010 and midwest generation 2012 moreover excessive use of financial leverage was the primary culprit that led to the u s financial crisis between 2007 and 2009 the demise of lehman brothers 2008 and a host of other highly levered financial institutions are prime examples of the negative ramifications that are associated with the use of highly levered capital structures example of how to use dflconsider the following example to illustrate the concept assume hypothetical company bigbox inc has operating income or earnings before interest and taxes ebit of 100 million in year 1 with interest expense of 10 million and has 100 million shares outstanding for the sake of clarity let s ignore the effect of taxes for the moment eps for bigbox in year 1 would thus be operating income of 100 million 10 million interest expense 100 million shares outstanding 0 90 frac text operating income of 100 million text 10 million interest expense text 100 million shares outstanding 0 90 100 million shares outstandingoperating income of 100 million 10 million interest expense 0 90the degree of financial leverage dfl is 100 million 100 million 10 million 1 11 frac text 100 million text 100 million text 10 million 1 11 100 million 10 million 100 million 1 11this means that for every 1 change in ebit or operating income eps would change by 1 11 now assume that bigbox has a 20 increase in operating income in year 2 notably interest expenses remain unchanged at 10 million in year 2 as well eps for bigbox in year 2 would thus be operating income of 120 million 10 million interest expense 100 million shares outstanding 1 10 frac text operating income of 120 million text 10 million interest expense text 100 million shares outstanding 1 10 100 million shares outstandingoperating income of 120 million 10 million interest expense 1 10in this instance eps has increased from 90 cents in year 1 to 1 10 in year 2 which represents a change of 22 2 this could also be obtained from the dfl number 1 11 x 20 ebit change 22 2 if ebit had decreased instead to 70 million in year 2 what would have been the impact on eps eps would have declined by 33 3 i e dfl of 1 11 x 30 change in ebit this can be easily verified since eps in this case would have been 60 cents which represents a 33 3 decline | |
what is the degree of operating leverage dol | the degree of operating leverage dol is a multiple that measures how much the operating income of a company will change in response to a change in sales companies with a large proportion of fixed costs or costs that don t change with production to variable costs costs that change with production volume have higher levels of operating leverage 1the dol ratio assists analysts in determining the impact of any change in sales on company earnings or profit formula and calculation of degree of operating leverage d o l change in e b i t change in sales where e b i t earnings before income and taxes begin aligned dol frac text change in ebit text change in sales textbf where ebit text earnings before income and taxes end aligned dol change in sales change in ebit where ebit earnings before income and taxes there are a number of alternative ways to calculate the dol each based on the primary formula given above degree of operating leverage change in operating income changes in sales text degree of operating leverage frac text change in operating income text changes in sales degree of operating leverage changes in saleschange in operating income degree of operating leverage contribution margin operating income text degree of operating leverage frac text contribution margin text operating income degree of operating leverage operating incomecontribution margin degree of operating leverage sales variable costs sales variable costs fixed costs text degree of operating leverage frac text sales variable costs text sales variable costs fixed costs degree of operating leverage sales variable costs fixed costssales variable costs degree of operating leverage contribution margin percentage operating margin text degree of operating leverage frac text contribution margin percentage text operating margin degree of operating leverage operating margincontribution margin percentage investopedia candra huff | |
what the degree of operating leverage can tell you | the higher the degree of operating leverage dol the more sensitive a company s earnings before interest and taxes ebit are to changes in sales assuming all other variables remain constant the dol ratio helps analysts determine what the impact of any change in sales will be on the company s earnings operating leverage measures a company s fixed costs as a percentage of its total costs it is used to evaluate a business breakeven point which is where sales are high enough to pay for all costs and the profit is zero 2 a company with high operating leverage has a large proportion of fixed costs which means that a big increase in sales can lead to outsized changes in profits a company with low operating leverage has a large proportion of variable costs which means that it earns a smaller profit on each sale but does not have to increase sales as much to cover its lower fixed costs example of how to use degree of operating leverageas a hypothetical example say company x has 500 000 in sales in year one and 600 000 in sales in year two in year one the company s operating expenses were 150 000 while in year two the operating expenses were 175 000 year one e b i t 5 0 0 0 0 0 1 5 0 0 0 0 3 5 0 0 0 0 year two e b i t 6 0 0 0 0 0 1 7 5 0 0 0 4 2 5 0 0 0 begin aligned text year one ebit 500 000 150 000 350 000 text year two ebit 600 000 175 000 425 000 end aligned year one ebit 500 000 150 000 350 000year two ebit 600 000 175 000 425 000 next the percentage change in the ebit values and the percentage change in the sales figures are calculated as change in e b i t 4 2 5 0 0 0 3 5 0 0 0 0 1 2 1 4 3 change in sales 6 0 0 0 0 0 5 0 0 0 0 0 1 2 0 begin aligned text change in ebit 425 000 div 350 000 1 21 43 text change in sales 600 000 div 500 000 1 20 end aligned change in ebit change in sales 425 000 350 000 1 21 43 600 000 500 000 1 20 lastly the dol ratio is calculated as d o l change in operating income change in sales 2 1 4 3 2 0 1 0 7 1 4 begin aligned dol frac text change in operating income text change in sales frac 21 43 20 1 0714 end aligned dol change in sales change in operating income 20 21 43 1 0714 the difference between degree of operating leverage and degree of combined leveragethe degree of combined leverage dcl extends the degree of operating leverage to get a fuller picture of a company s ability to generate profits from sales it multiplies dol by degrees of financial leverage dfl weighted by the ratio of change in earnings per share eps over change in sales 3this ratio summarizes the effects of combining financial and operating leverage and what effect this combination or variations of this combination has on the corporation s earnings not all corporations use both operating and financial leverage but this formula can be used if they do a firm with a relatively high level of combined leverage is seen as riskier than a firm with less combined leverage because high leverage means more fixed costs to the firm | |
what are degrees of freedom | degrees of freedom are the maximum number of logically independent values which may vary in a data sample degrees of freedom are calculated by subtracting one from the number of items within the data sample understanding degrees of freedomdegrees of freedom are the number of independent variables that can be estimated in a statistical analysis and tell you how many items can be randomly selected before constraints must be put in place within a data set some initial numbers can be chosen at random however if the data set must add up to a specific sum or mean for example the number in the data set is constrained to evaluate the values of all other values in a data set then meet the set requirement examples of degrees of freedomexample 1 consider a data sample consisting of five positive integers the values of the five integers must have an average of six if four items within the data set are 3 8 5 and 4 the fifth number must be 10 because the first four numbers can be chosen at random the degree of freedom is four example 2 consider a data sample consisting of five positive integers the values could be any number with no known relationship between them because all five can be chosen at random with no limitations the degree of freedom is four example 3 consider a data sample consisting of one integer that integer must be odd because there are constraints on the single item within the data set the degree of freedom is zero degrees of freedom formulathe formula to determine degrees of freedom is d f n 1 where d f degrees of freedom n sample size begin aligned text d text f n 1 textbf where text d text f text degrees of freedom n text sample size end aligned df n 1where df degrees of freedomn sample size for example imagine a task of selecting ten baseball players whose batting average must average to 250 the total number of players that will make up our data set is the sample size so n 10 in this example 9 10 1 baseball players can be randomly picked with the 10th baseball player having a specific batting average to adhere to the 250 batting average constraint some calculations of degrees of freedom with multiple parameters or relationships use the formula df n p where p is the number of different parameters or relationships for example in a 2 sample t test n 2 is used because there are two parameters to estimate applying degrees of freedomin statistics degrees of freedom define the shape of the t distribution used in t tests when calculating the p value depending on the sample size different degrees of freedom will display different t distributions calculating degrees of freedom is critical when understanding the importance of a chi square statistic and the validity of the null hypothesis degrees of freedom also have conceptual applications outside of statistics consider a company deciding the purchase of raw materials for its manufacturing process the company has two items within this data set the amount of raw materials to acquire and the total cost of the raw materials the company freely decides one of the two items but their choice will dictate the outcome of the other because it can only freely choose one of the two it has one degree of freedom in this situation if the company decides the amount of raw materials it cannot decide the total amount spent by setting the total amount to spend the company may be limited in the amount of raw materials it can acquire chi square teststhere are two different kinds of chi square tests the test of independence which asks a question of relationship such as is there a relationship between gender and sat scores and the goodness of fit test which asks something like if a coin is tossed 100 times will it come up heads 50 times and tails 50 times for these tests degrees of freedom are utilized to determine if a null hypothesis can be rejected based on the total number of variables and samples within the experiment for example when considering students and course choice a sample size of 30 or 40 students is likely not large enough to generate significant data getting the same or similar results from a study using a sample size of 400 or 500 students is more valid t testto perform a t test you must calculate the value of t for the sample and compare it to a critical value the critical value will vary and you can determine the correct critical value by using a data set s t distribution with the degrees of freedom sets with lower degrees of freedom have a higher probability of extreme values and higher degrees of freedom such as a sample size of at least 30 will be much closer to a normal distribution curve smaller sample sizes will correspond with smaller degrees of freedom and result in fatter t distribution tails in the examples above many of the situations may be used as a 1 sample t test for instance example 1 where five values are selected but must add up to a specific average can be defined as a 1 sample t test this is because there is only one constraint being placed on the variable history of degrees of freedomthe earliest and most basic concept of degrees of freedom was noted in the early 1800s intertwined in the works of mathematician and astronomer carl friedrich gauss the modern usage and understanding of the term were expounded upon first by william sealy gosset an english statistician in his article the probable error of a mean published in biometrika in 1908 under a pen name to preserve his anonymity 1in his writings gosset did not specifically use the term degrees of freedom he did explain the concept throughout developing what would eventually be known as student s t distribution the term was not popular until 1922 english biologist and statistician ronald fisher began using the term degrees of freedom when he published reports and data on his work developing chi squares 1 | |
what does degrees of freedom tell you | degrees of freedom tell you how many units within a set can be selected without constraints to still abide by a given rule overseeing the set for example consider a set of five items that add to an average value of 20 degrees of freedom tell you how many of the items 4 can be randomly selected before constraints must be put in place in this example once the first four items are picked you no longer have the liberty to randomly select a data point because you must force balance to the given average | |
is the degree of freedom always 1 | degrees of freedom are always the number of units within a given set minus 1 it is always minus one because if parameters are placed on the data set the last data item must be specific so all other points conform to that outcome the bottom linesome statistical analysis processes may call for an indication of the number of independent values that can vary within an analysis to meet constraint requirements this indication is the degrees of freedom the number of units in a sample size that can be chosen randomly before a specific value must be picked | |
what are degrees of freedom | degrees of freedom are the maximum number of logically independent values which may vary in a data sample degrees of freedom are calculated by subtracting one from the number of items within the data sample understanding degrees of freedomdegrees of freedom are the number of independent variables that can be estimated in a statistical analysis and tell you how many items can be randomly selected before constraints must be put in place within a data set some initial numbers can be chosen at random however if the data set must add up to a specific sum or mean for example the number in the data set is constrained to evaluate the values of all other values in a data set then meet the set requirement examples of degrees of freedomexample 1 consider a data sample consisting of five positive integers the values of the five integers must have an average of six if four items within the data set are 3 8 5 and 4 the fifth number must be 10 because the first four numbers can be chosen at random the degree of freedom is four example 2 consider a data sample consisting of five positive integers the values could be any number with no known relationship between them because all five can be chosen at random with no limitations the degree of freedom is four example 3 consider a data sample consisting of one integer that integer must be odd because there are constraints on the single item within the data set the degree of freedom is zero degrees of freedom formulathe formula to determine degrees of freedom is d f n 1 where d f degrees of freedom n sample size begin aligned text d text f n 1 textbf where text d text f text degrees of freedom n text sample size end aligned df n 1where df degrees of freedomn sample size for example imagine a task of selecting ten baseball players whose batting average must average to 250 the total number of players that will make up our data set is the sample size so n 10 in this example 9 10 1 baseball players can be randomly picked with the 10th baseball player having a specific batting average to adhere to the 250 batting average constraint some calculations of degrees of freedom with multiple parameters or relationships use the formula df n p where p is the number of different parameters or relationships for example in a 2 sample t test n 2 is used because there are two parameters to estimate applying degrees of freedomin statistics degrees of freedom define the shape of the t distribution used in t tests when calculating the p value depending on the sample size different degrees of freedom will display different t distributions calculating degrees of freedom is critical when understanding the importance of a chi square statistic and the validity of the null hypothesis degrees of freedom also have conceptual applications outside of statistics consider a company deciding the purchase of raw materials for its manufacturing process the company has two items within this data set the amount of raw materials to acquire and the total cost of the raw materials the company freely decides one of the two items but their choice will dictate the outcome of the other because it can only freely choose one of the two it has one degree of freedom in this situation if the company decides the amount of raw materials it cannot decide the total amount spent by setting the total amount to spend the company may be limited in the amount of raw materials it can acquire chi square teststhere are two different kinds of chi square tests the test of independence which asks a question of relationship such as is there a relationship between gender and sat scores and the goodness of fit test which asks something like if a coin is tossed 100 times will it come up heads 50 times and tails 50 times for these tests degrees of freedom are utilized to determine if a null hypothesis can be rejected based on the total number of variables and samples within the experiment for example when considering students and course choice a sample size of 30 or 40 students is likely not large enough to generate significant data getting the same or similar results from a study using a sample size of 400 or 500 students is more valid t testto perform a t test you must calculate the value of t for the sample and compare it to a critical value the critical value will vary and you can determine the correct critical value by using a data set s t distribution with the degrees of freedom sets with lower degrees of freedom have a higher probability of extreme values and higher degrees of freedom such as a sample size of at least 30 will be much closer to a normal distribution curve smaller sample sizes will correspond with smaller degrees of freedom and result in fatter t distribution tails in the examples above many of the situations may be used as a 1 sample t test for instance example 1 where five values are selected but must add up to a specific average can be defined as a 1 sample t test this is because there is only one constraint being placed on the variable history of degrees of freedomthe earliest and most basic concept of degrees of freedom was noted in the early 1800s intertwined in the works of mathematician and astronomer carl friedrich gauss the modern usage and understanding of the term were expounded upon first by william sealy gosset an english statistician in his article the probable error of a mean published in biometrika in 1908 under a pen name to preserve his anonymity 1in his writings gosset did not specifically use the term degrees of freedom he did explain the concept throughout developing what would eventually be known as student s t distribution the term was not popular until 1922 english biologist and statistician ronald fisher began using the term degrees of freedom when he published reports and data on his work developing chi squares 1 | |
what does degrees of freedom tell you | degrees of freedom tell you how many units within a set can be selected without constraints to still abide by a given rule overseeing the set for example consider a set of five items that add to an average value of 20 degrees of freedom tell you how many of the items 4 can be randomly selected before constraints must be put in place in this example once the first four items are picked you no longer have the liberty to randomly select a data point because you must force balance to the given average | |
is the degree of freedom always 1 | degrees of freedom are always the number of units within a given set minus 1 it is always minus one because if parameters are placed on the data set the last data item must be specific so all other points conform to that outcome the bottom linesome statistical analysis processes may call for an indication of the number of independent values that can vary within an analysis to meet constraint requirements this indication is the degrees of freedom the number of units in a sample size that can be chosen randomly before a specific value must be picked | |
what is a delayed draw term loan | a delayed draw term loan ddtl is a special feature in a term loan that lets a borrower withdraw predefined amounts of a total pre approved loan amount the withdrawal periods such as every three six or nine months are also determined in advance a ddtl is included as a provision of the borrower s agreement which lenders may offer to businesses with high credit standings a ddtl is often included in contractual loan deals for businesses who use the loan proceeds as financing for future acquisitions or expansion understanding delayed draw term loansa delayed draw term loan requires that special provisions be added to the borrowing terms of a lending agreement for example at the origination of the loan the lender and borrower may agree to the terms that the borrower may take out 1 million every quarter out of a loan valued at a total of 10 million such provisions allow a lender to manage its cash requirements better in some cases the terms of the delayed installment payouts are based on milestones achieved by the company such as sales growth requirement or meeting a specified number of unit sales by a specific time earnings growth and other financial milestones might also be considered for example a company is required to meet or exceed a certain level of earnings in each quarter of its fiscal year in order to receive the payouts from a delayed term loan for the borrower a delayed draw term loan offers a limit on how much it can draw on a loan which can act as a governor to spending thereby reducing its debt burden and interest payments at the same time the delayed draw gives the borrower the flexibility of knowing that it will have a guaranteed periodic cash infusion ddtl special considerationsgenerally delayed draw term loan provisions are included in institutional lending deals involving more substantial payouts than consumer loans with greater complexity and maintenance these types of loans can have complicated structures and terms they are most commonly offered to businesses with high credit ratings and usually come with more favorable interest rates for the borrower than other credit options since 2017 however ddtls have seen increased use in the larger broadly syndicated leveraged loan market in loans worth several hundred millions of dollars the leveraged loan market is known for lending to individuals and companies with high debt or poor credit histories delayed draw term loans can be structured in a number of ways they may be part of a single lending agreement between a financial institution and a business or they may be included as part of a syndicated loan deal in any situation there are different types of contractual caveats or requirements borrowers must meet once provided by middle market lenders via non syndicated leveraged loans delayed draw term loan terms have become popular in larger broadly syndicated leveraged loans | |
what is deleveraging | deleveraging is when a company or individual attempts to decrease its total financial leverage in other words deleveraging is the reduction of debt and the opposite of leveraging the most direct way for an entity to deleverage is to immediately pay off any existing debts and obligations on its balance sheet if unable to do this the company or individual may be in a position of an increased risk of default understanding deleverageleverage or debt has advantages such as tax benefits on the interest deducted deferred cash outlays and avoiding equity dilution debt has become an integral aspect of our society at the most basic level businesses use it to finance their operations fund expansions and pay for research and development however if companies take on too much debt the interest payments or cost to service that debt can do financial harm to the company as a result companies are sometimes forced to deleverage or pay down debt by liquidating or selling their assets or restructuring their debt if used properly debt can be a catalyst to help a company fund its long term growth by using debt businesses can pay their bills without issuing more equity thus preventing the dilution of shareholders earnings share dilution occurs when companies issue stock which leads to a reduction in the percentage of ownership of existing shareholders or investors although companies can raise capital or funds by issuing shares of stock the drawback is that it can lead to a lower stock price for existing shareholders due to share dilution the alternative is for companies to borrow money a company could issue debt directly to investors in the form of bonds the investors would pay the company a principal amount upfront for the bond and in return get paid periodic interest payments as well as the principal back at the bond s maturity date companies could also raise money by borrowing from a bank or creditor for example if a company formed with an investment of 5 million from investors the equity in the company is 5 million the money the company uses to operate if the company further incorporates debt financing by borrowing 20 million the company now has 25 million to invest in capital budgeting projects and more opportunity to increase value for the fixed number of shareholders companies will often take on excessive amounts of debt to initiate growth however using leverage substantially increases the riskiness of the firm if leverage does not further growth as planned the risk can become too much for a company to bear in these situations all the firm can do is delever by paying off debt deleverage may be a red flag to investors who require growth in their companies the goal of deleveraging is to reduce the relative percentage of a business s balance sheet that is funded by liabilities essentially this can be accomplished in one of two ways first a company or individual can raise cash through business operations and use that excess cash to eliminate liabilities second existing assets such as equipment stocks bonds real estate business arms to name a few can be sold and the resulting proceeds can be directed to paying off debt in either case the debt portion of the balance sheet will be reduced the personal savings rate is one indicator of deleveraging as people save more money they are not borrowing 1 | |
when deleveraging goes wrong | wall street can greet a successful deleveraging favorably for instance announcements of major layoffs can send share prices rising however deleveraging doesn t always go as planned when the need to raise capital to reduce debt levels forces firms to sell off assets that they don t wish to sell at fire sale prices the price of a company s shares generally suffers in the short run worse yet when investors get the feeling that a company is holding bad debts and unable to deleverage the value of that debt plummets even further companies are then forced to sell it at a loss if they can sell it at all inability to sell or service the debt can result in business failure firms that hold the toxic debt of failing companies can face a substantial blow to their balance sheets as the market for those fixed income instruments collapses such was the case for firms holding the debt of lehman brothers prior to its 2008 collapse economic effects of deleveragingborrowing and credit are integral pieces of economic growth and corporate expansion when too many people and firms decide to pay off their debts all at once and not take on any more the economy can suffer although deleveraging is typically good for companies if it occurs during a recession or an economic downturn it can limit credit growth in an economy as companies deleverage and cut their borrowing the downward spiral in the economy can accelerate as a result the government is forced to step in and take on debt leverage to buy assets and put a floor under prices or to encourage spending this fiscal stimulus can come in a variety of forms including buying mortgage backed securities to prop up housing prices and encourage bank lending issuing government backed guarantees to prop up the value of certain securities taking financial positions in failing companies providing tax rebates directly to consumers subsidizing the purchase of appliances or automobiles through tax credits or a host of similar actions the federal reserve can also lower the federal funds rate to make it less expensive for banks to borrow money from each other push down interest rates and encourage the banks to lend to consumers and businesses 2 taxpayers are usually responsible for paying off federal debt when governments bail out businesses that have suffered and are going through the deleveraging process examples of deleveraging and financial ratiosfor example let s assume company x has 2 000 000 in assets of which 1 000 000 is funded by debt and 1 000 000 is funded by equity during the year company x earns 500 000 in net income or profit although there are many financial ratios available to measure a company s financial health three of the key ratios that we ll be using are outlined below below are the ratio calculations using the financial information from company x instead of the above scenario assume that at the beginning of the year the company decided to use 800 000 of assets to pay off 800 000 of liabilities in this scenario company x would now have 1 200 000 in assets of which 200 000 is funded by debt and 1 000 000 is funded by equity if the company made the same 500 000 during the course of the year its return on assets return on equity and debt to equity values would be as follows the second set of ratios show the company to be much healthier and investors or lenders would thus find the second scenario more favorable | |
what is a delinquency rate | delinquency rate refers to the percentage of loans within a financial institution s loan portfolio whose payments are delinquent when analyzing and investing in loans the delinquency rate is an important metric to follow it is easy to find comprehensive statistics on the delinquencies of all types of loans | |
how delinquency rates work | typically a lender will not report a loan as being delinquent until the borrower has missed two consecutive payments after which a lender will report to the credit reporting agencies or credit bureaus that the borrower is 60 days late in their payment if late payments persist then each month that the borrower is late the lender may continue reporting the delinquency to the credit agencies for as long as 270 days after 270 days of late payments the code of federal regulations considers any type of federal loan to be in default loans between borrowers and private sector lenders follow individual u s state codes that define when a loan is in default to begin the process of retrieving delinquent payments lenders generally work with third party collection agents the credit bureaus may give borrowers various delinquency rate marks on the individual tradelines included with their credit reports if a borrower is consistently delinquent they will receive marks for 60 days late 90 days late and so on if a borrower makes a payment and defaults again then a new cycle of delinquency appears on the tradeline when considering a borrower for credit approval credit agencies and lenders consider all of a borrower s delinquent marks often especially with corporate debt lenders will report total delinquency rates on loans according to the borrower s credit quality this can help investors gain insights into the risks involved with specific loans to calculate a delinquency rate divide the number of loans that are delinquent by the total number of loans that an institution holds for example if there are 1 000 loans in a bank s loan portfolio and 100 of those loans have delinquent payments of 60 days or more then the delinquency rate would be 10 100 divided by 1 000 equals 10 special considerations publicly reported delinquency ratesthe federal reserve system frs provides public data on delinquency rates quarterly across the u s financial market as of the first quarter of 2022 the most recent quarter for which data have been compiled the total delinquency rate from loans and leases at commercial banks was 1 40 residential real estate loans reported the highest delinquency rate at 2 13 consumer credit cards reported the second highest delinquency rate at 1 73 1 | |
what kinds of loans have the highest delinquency rates | student loans have the highest delinquency rates overall at 12 through the period of may 2021 may 2022 according to the federal reserve although the percentage has declined since reaching a high of 17 in the fall of 2019 prior to the covid 19 pandemic student loan delinquencies have declined throughout the pandemic as a result of the payment relief included in the coronavirus aid relief and economic security act cares act and various executive orders 2 | |
what kinds of bank loans have the highest delinquency rates | as per the federal reserve the types of loans with the highest delinquency rates as of 2022 are residential real estate loans followed by consumer credit cards miscellaneous consumer loans farmland real estate loans consumer agricultural loans consumer c i loans consumer leases and commercial real estate loans | |
what does delinquent mean | the term delinquent refers to the state of being in arrears when someone is delinquent they are past due on their financial obligation s such as a loan credit card or bond payments this means a borrower s payments are not made to satisfy their debt s in a timely manner delinquent entities can be either individuals or corporations financial delinquency often leads to default if the arrears aren t brought up to date the term may also be used to describe the failure to perform a duty by financial professionals | |
how being delinquent works | as noted above the meaning of the word delinquent depends on how it s being used in finance it commonly refers to a situation where a borrower is late or overdue on a payment such as income taxes a mortgage an automobile loan or a credit card account an account that s at least 30 days past due is generally considered to be delinquent 1the consequences for being delinquent vary based on the account contract and creditor too many delinquencies in a row can lead a debtor into default factors include the type duration and cause of the delinquency 2 for instance if you don t make your credit card payment you may have to pay a late fee mortgage lenders on the other hand can initiate foreclosure proceedings if homeowners don t bring their payments up to date within a certain amount of time 3delinquencies also affect your credit rating your payment history is a major consideration in calculating your credit score in fact it makes up 35 of the total score so being delinquent can drag it down keep in mind though that a few delinquent payments may not make a huge impact but it will if you are consistently late or don t pay at all 4special considerationsdelinquency also describes a dereliction of duty or neglect by a financial professional for example a registered investment advisor who puts a conservative income oriented client into a highly speculative stock could be found delinquent in his fiduciary duties if an insurance company fails to warn a universal life policyholder that their policy is in danger of lapsing due to insufficient premium payments it could be considered delinquent 5most people are familiar with the legal definition of delinquent which is commonly used to describe someone usually a younger individual who commits minor crimes 6delinquent vs defaultdelinquency occurs as soon as a borrower misses a payment on a loan being consistently delinquent can lead to default default occurs when a borrower fails to repay a debt as specified in the original contract most creditors allow borrowers to remain in delinquency for some time before it is considered to be in default the length of time it takes to go into default varies based on the lender and the type of debt 7for example the u s government allows student debt to be delinquent for 270 days before declaring it to be in default 8 most lenders consider single family mortgages seriously delinquent if they are 90 days behind in payment after which they are in default and subject to foreclosure 39lenders often work with borrowers to help bring delinquent or defaulted accounts up to date which means you may be able to bring your account up to date the lender may not take any other action if you can come up with a suitable arrangement keep in mind though that significant delinquencies and defaults will affect your credit score 7if you can t make a payment arrangement during default the lender may proceed with further action for instance your account may be sent to a third party agency for collections if you still can t pay the creditor may pursue legal action and seek judgment against you if the debt is secured the lender can sell the security and pay off the debt you may still be liable for any remaining balance or additional fees read your contract to find out how long it takes for your lender to consider you in delinquency and in default current and historical delinquency ratesthe delinquency rate is the amount of debt that is past due this rate is expressed as a percentage and is generally used to characterize a financial institution s lending portfolio delinquency rates are calculated by dividing the total number of delinquent loans by the total number of loans held by a lender lower delinquency rates mean fewer people are late on their payments the federal reserve tracks delinquency rates in the united states every quarter as of the third quarter of 2023 the average rate for all loans and leases was 1 33 residential real estate delinquencies were highest with a rate of 1 72 while credit cards topped the list of delinquency rates for consumer loans at 2 98 the rate has steadily dropped since the recovery period following the 2007 2008 financial crisis for instance the overall delinquency rate during the first quarter of 2010 was 7 4 which included rates of 11 54 and 5 78 for residential real estate and credit cards respectively 10delinquent credit cardscredit card delinquencies happen when you fail to make your regular monthly payments these intervals are normally divided into days you are generally considered delinquent if you re 30 days past due although some lenders wait until you re 45 or 60 days to report late payments as being delinquent remember being delinquent impacts your credit score a few late payments here or there won t make a major dent in your rating but multiple delinquencies will add up to a lower score you can expect to take a big hit if you have three to four missed payments especially if they occur in a row this can prevent you from getting credit in the future 11delinquent loansloans work a little differently than other types of debt when you sign up for a loan you agree to repay the lender a specific amount of money at regular intervals until the debt is paid off the lender determines the due date and in some cases may allow you to set this date based on your personal financial situation most lenders also include a grace period which may be a few days after your due date if you make your payment on or before this date it may not be considered late but you may still incur interest but not a late payment fee if you fail to make the payment before you are considered delinquent your loan is in delinquent status even if you make your payment a day or two after the due date real world example of being delinquenthere s an example of what it means to be delinquent the federal reserve bank of new york found that in the fourth quarter of 2018 delinquent u s student loans reached 146 billion however the bank stated that delinquency rates for student loans are likely understated by as much as half meaning that about 300 billion of student loan debt has not been serviced in at least three months as of the end of q4 2018 this figure underscores the true extent of the student loan crisis 12 | |
what is an act of delinquency | the definition of being in delinquency depends on the context in which it s being used in finance it often refers to the state of being late on a debt for instance a borrower is considered delinquent if they don t make their credit card payment on time being delinquent can also mean that a financial professional neglects to live up to their fiduciary responsibilities an investment advisor who suggests that a retired client invest in a risky venture is deemed as being delinquent can a delinquency be removed delinquencies are reported to credit reporting agencies but just because it appears on your history doesn t mean that it s impossible to remove it from your credit report submit a report either online or in writing to the credit bureau disputing the delinquency you should also contact the lender to see what can be done especially if you had a good reason for allowing the account to go into delinquency status you may have to offer to pay the account balance to have it deleted from your credit report | |
how can you prevent delinquency | there are several ways to prevent delinquencies some options include automatic payments which help individuals who have a difficult time keeping up with payment schedules sign up for e billing so you receive email invoices rather than paper copies from your lenders you can also ask your lender to move due dates closer to your pay dates | |
what is a delinquent status | a delinquent status means that you are behind in your payments the length of time varies by lender and the type of debt but this period generally falls anywhere between 30 to 90 days | |
what is a delinquent account credit card | from the perspective of a credit card company a particular credit card is said to be delinquent if the customer in question has failed to make their minimum monthly payment for 30 days from their original due date generally credit card companies will begin reaching out to the customer once their minimum amount due on the account has been late for 30 days if the account is still delinquent for 60 days or longer then the credit card company will typically begin the process of debt collection this process can involve legal action and the use of credit collection firms understanding a delinquent account credit cardone of the first steps taken by credit card companies upon detecting a delinquent account is to try to contact the account holder if an agreement can be reached with the customer in a timely fashion the credit card company may not take any further action however if an agreement cannot be reached the company will likely begin by reporting the delinquent account to a credit reporting agency for this reason delinquent accounts can have a severe negative effect on a borrower s credit rating particularly if the delinquency persists beyond the 60 day mark generally the immediate impact of delinquency is a 25 to 50 point decrease in the borrower s credit score however additional decreases can occur if the delinquency is not corrected thereafter account delinquencies are one of the most challenging factors to overcome for borrowers seeking to improve their credit score as they can remain on a borrower s credit report for up to seven years 1 for some borrowers this could mean dropping from a very competitive credit score to one which is merely acceptable such as dropping from 740 points to 660 depending on the terms of the credit card in question the borrower may also be faced with additional monetary penalties if their account becomes delinquent most credit issuers maintain proprietary debt collection services for early delinquencies however delinquent credit card accounts that remain unpaid will eventually get sold to a third party debt collector these debt collectors are charged with obtaining the original debt owed with interest and may take legal action debt that is considered written off is also reported to credit bureaus and can have an even greater negative impact on a borrower s credit score than one off delinquencies that are subsequently corrected credit card debt is a significant issue in the united states with a total of 807 billion owed across approximately 506 million cards in 2021 the average american family credit card debt is 6 270 with 45 4 of american families carrying some credit card debt 2example of a delinquent account credit cardmark is a client of xyz financial where he holds a credit card he uses his credit card regularly for a variety of purchases and typically pays only the minimum payment required each month one month however mark forgets to make his payment and is contacted 30 days later by xyz he is told by xyz that his account has become delinquent and that he should promptly make up for the lost payment in order to avoid incurring a negative impact on his credit score because the missed payment was unintentional mark apologizes for the oversight and promptly makes up for the lost payment if mark had refused to make up the lost payment xyz may have had to collect on his debt to do so they would have first reported the delinquency to one or more credit reporting agencies then they would either seek to collect the debt themselves or they would rely on a third party debt collection service if mark was unable to pay his outstanding debt this would have impacted his credit score | |
what is delisting | delisting is the removal of a listed security from a stock exchange the delisting of a security can be voluntary or involuntary and usually results when a company ceases operations declares bankruptcy merges does not meet listing requirements or seeks to become private | |
how delisting works | companies must meet specific guidelines called listing standards before they can be listed on an exchange each exchange such as the new york stock exchange nyse establishes its own set of rules and regulations for listings companies that fail to meet the minimum standards set by an exchange will be involuntarily delisted the most common standard is price for example a company with a share price under 1 per share for a period of months may find itself at risk of being delisted from the nasdaq alternatively a company can voluntarily request to be delisted some companies choose to become privately traded when they identify through a cost benefit analysis that the costs of being publicly listed exceed the benefits requests to delist often occur when companies are purchased by private equity firms and will be reorganized by new shareholders these companies can apply for delisting to become privately traded also when listed companies merge and trade as a new entity the formerly separate companies voluntarily request delisting companies usually delist because they want to go private are taken over by private equity firms or fail to meet the minimum standards set by their exchange the reasons for delisting include violating regulations and failing to meet minimum financial standards financial standards include the ability to maintain a minimum share price financial ratios and sales levels when a company does not meet listing requirements the listing exchange issues a warning of noncompliance if noncompliance continues the exchange delists the company s stock more reasons for being delisted are discussed below to avoid being delisted some companies will undergo a reverse split of their stock shares this has the effect of combining several shares into one and multiplying the share price for example if a company executes a 1 for 10 reverse split it could raise its share price from 50 cents per share to five dollars per share in which case it would no longer be at risk of delisting one way for companies to get around minimum share price rules is by engaging in a reverse split the consequences of delisting can be significant since stock shares not traded on one of the major stock exchanges are more difficult for investors to research and harder to purchase this means that the company is unable to issue new shares to the market to establish new financial initiatives often involuntary delistings are indicative of a company s poor financial health or poor corporate governance warnings issued by an exchange should be taken seriously for example on april 23 2023 bed bath beyond inc filed for voluntary chapter 11 protection as a result nasdaq informed the company that bed bath beyond s common stock would be suspended at the opening of business on may 3 2023 as communicated the stock has been delisted in the united states delisted securities may be traded otc except when they are delisted to become a private company or because of liquidation | |
what are common reasons companies get delisted | while there is no infallible method to predict stock delistings there are certain warning indicators that may suggest that a stock is at risk of being removed from trading these were discussed briefly above below is a more comprehensive list of indicators that may indicate when a company s stock may be delisted be mindful that this list may not be exhaustive | |
when a company fails to comply with listing requirements it will receive adequate warning delisting doesn t happen overnight notifications are made and time is granted to the subject to get its affairs in order if the noncompliance continues after these warnings are made the company will then be removed from the exchange | voluntary delisting works differently if a company decides it no longer wants to operate in the public eye it must consult with its stakeholders first a resolution has to be passed in a board meeting and put to shareholders once enough shareholders are on board the company needs to get the green light from the stock exchange that it wishes to delist from and put out a statement outlining its intent an investment bank will be in charge of managing the delisting one of its first jobs is making sure there is enough money to buy back the shares investment banks don t just assist companies to list their shares they are also recruited to help with the delisting process in order to delist the company essentially needs to buy back a certain percentage of shares from the total outstanding this threshold is decided by the exchange to buy these shares a bidding process occurs a fair price is negotiated and announced to the public and the company pays up within a specified deadline to see its delisting through to convince investors the company will usually have to pay them a premium to the current share price | |
when a company delists voluntarily shareholders will usually receive cash to buy them out or shares in the new acquiring company when it is forced to go the outcome is usually different no special offer comes you either find a buyer on the exchange or are left holding a stake in a company that s no longer listed | holding delisted stocks generally isn t very desirable the shares don t disappear but do become much more difficult to trade once off the exchange they can trade otc these markets don t offer the same accessibility and liquidity as the major exchanges you ll be faced with higher transaction costs and wider bid ask spreads another factor to consider is that there s less regulation outside of the major exchanges requirements are more relaxed including those relating to communications leaving investors more in the dark and unaware of what is going on within the company in which they re invested | |
what should i do after delisting | if you still hold shares after they ve been delisted your next step depends a lot on what you re invested in how convinced you are about its prospects and whether you have the stomach to deal with the murkier less transparent alternative exchanges you can still sell the shares but the conditions to do so will now be generally less favorable volume thins out when you leave a major exchange with otc transactions there are fewer buyers and sellers meaning wider bid ask spreads and getting less than the going rate in some cases you may only be able to trade the shares by appointment in most cases it s best to sell stock before it delists can i sell my shares after a delisting if you still hold shares after they are delisted you can sell them just not on the exchange on which they traded before stock exchanges are very advantageous for buying and selling shares when they delist and trade over the counter otc selling shares and getting a reasonable price for them becomes much harder can a delisted company get re listed yes it is possible for a delisted company to get re listed a lot depends on the circumstances of being delisted those forced to leave often find it difficult to get their affairs back in order and bounce back especially without the funding opportunities that the stock market provides there are a few success stories though can a delisting be good for a company delisting isn t always as bad as people make it out to be many household names have chosen to delist their shares and go private for good reason and some such as dell prospered from the benefits of being private the bottom linea company is delisted when it is removed from a stock exchange no longer selling shares to the public can be voluntary or involuntary companies may prefer to go private to avoid having to answer to the public and jump through regulatory hoops alternatively they may be kicked out of the exchange for failing to meet its listing requirements or because they ran out of money and went bankrupt investors holding shares after a delisting will only be able to sell them otc that generally means less liquidity finding it harder to locate buyers at the price you want and potentially being left in the dark about what the company is up to | |
what are deliverables | the term deliverables is a project management term that s traditionally used to describe the quantifiable goods or services that must be provided upon the completion of a project deliverables can be tangible or intangible in nature for example in a project focusing on upgrading a firm s technology a deliverable may refer to the acquisition of a dozen new computers on the other hand for a software project a deliverable might allude to the implementation of a computer program aimed at improving a company s accounts receivable computational efficiency investopedia nono floresunderstanding deliverablesin addition to computer equipment and software programs a deliverable may refer to in person or online training programs as well as design samples for products in the process of being developed in many cases deliverables are accompanied by instruction manuals deliverables are usually contractually obligated requirements detailed in agreements drawn up between two related parties within a company or between a client and an outside consultant or developer the documentation precisely articulates the description of a deliverable as well as the delivery timeline and payment terms many large projects include milestones which are interim goals and targets that must be achieved by stipulated points in time a milestone may refer to a portion of the deliverable due or it may merely refer to a detailed progress report describing the current status of a project in film production deliverables refer to the range of audio visual and paperwork files that producers must furnish to distributors audio and visual materials generally include stereo and dolby 5 1 sound mixes music and sound effects on separate files as well as the full movie in a specified format sometimes distributors that are purchasing independent films for theatrical release will not include a list of deliverables with the first draft of a term sheet it s thus important for filmmakers to proactively ask for the expected deliverables so that they can be assembled in a timely manner paperwork deliverables include signed and executed licensing agreements for all music errors and omissions reports performance releases for all on screen talent a list of the credit block that will appear in all artwork and advertising as well as location artwork and logo legal releases film deliverables also pertain to elements that are ancillary to the movies themselves these items include the trailer tv spots publicity stills photographed on set and other legal work types of deliverablesdeliverables can be tangible or intangible an example of a tangible deliverable would be the construction of a new office to place new workers that don t fit in the old office or a new manufacturing plant that needs to be built to meet increased production levels an example of an intangible deliverable would be a training program for employees to teach them how to use new software that will be used at the company internal deliverables are those deliverables that are in house and required to complete a project deliver a good or provide a service internal deliverables are not seen by the customer and are not considered final they are merely deliverables that are part of the steps in a project that will lead to the completion of that project for example the construction of a factory to produce more goods to meet increased customer demand would be an internal deliverable internal deliverables in project management are commonly known as project deliverables external deliverables on the other hand are final and provided to the customer in the example above the external deliverable would be the final good that comes out of the new factory that the customer will purchase and use in project management external deliverables are commonly known as product deliverables requirements for deliverablesat the start of any project there must be a defined end goal of what is to be achieved there must then be a clearly defined path to achieve that goal a project manager can lay out a timeline with deliverables to be met at certain intervals which are the milestones each project will have different requirements for the deliverables that need to be completed by the milestone dates the types of projects can be process based a phased approach product based or a critical change regardless of the type of project all will have set stages which typically include the initiation phase the planning phase the execution phase the monitoring phase and the closing phase at each of these phases there will be a requirement for different deliverables at the start of a project it is important to clearly define project deliverables which can be in the form of a swot analysis a gap analysis a project scope statement a design presentation or a gantt chart for example in the planning phase a deliverable might be a report outlining the entire project whereas in the monitoring phase the deliverables will be to report on the quality of the new product that was created | |
when a project is initiated there will be a contract drafted that will list expectations timelines and the types of deliverables to be provided these contracts can be drafted internally with different departments within an organization for project deliverables and with external clients for product deliverables | certain documentation may also take the form of a statement of work sow which is a document created at the onset of a project that outlines all aspects of the project that multiple parties can agree upon to set expectations | |
what are examples of deliverables | examples of deliverables include an initial project strategy report the budget report a progress report a beta product a test result report and any other quantifiable aspects of a project that mark a completion | |
what is the difference between an objective and a deliverable | an objective includes all items outside of a project such as the outcome and the benefits of a project the deliverables are the tangible results of the project that allow for the objectives to be achieved | |
how do you describe a deliverable | a deliverable is a final deadline or project milestone that can be provided to external or internal customers it is the end result or one of many end results in a project plan that can be quantifiable the bottom linedeliverables are the quantifiable goods or services that need to be provided at the various steps of a project as well as at the end of a project deliverables help to keep projects on course and allow for an efficient allocation of time and money they help managers stay on course and are critical to the success of a business | |
what is delivered at frontier daf | delivered at frontier daf is a term used in international shipping contracts that requires a seller to deliver goods to a border location the seller is usually responsible for all costs of transporting the goods to the drop off point for the buyer the party picking up the goods will usually be importing them and traveling across customs understanding delivered at frontier delivered at frontier is a shipping contract term that may be used when shipping goods across borders frontier is a designation for a border on a transportation route that is usually highly trafficked and includes a customs freight inspection shipping agreements are an important part of the transportation of all types of goods from a seller to a buyer international shipping will often be more complex than standard domestic shipping because it involves customs controls sellers and buyers create binding shipping agreements which can include a multitude of terms to ensure that shipping instructions are clear that the appropriate liabilities are clearly stated to avoid confusion and that shipping is efficient as such shipping agreements include a variety of provisions and are legally binding in the case of a shipping contract including a delivered at frontier drop off the seller of the goods is usually responsible for all costs pertaining to the goods while they are in their possession delivered at frontier will clearly detail an exact location for drop off and the individuals meeting the seller the party picking up the goods on behalf of the buyer will usually be traveling across border customs and importing the goods frontier border drop offs are an important location for international commerce they can be land drop offs or seaport drop offs land drop offs can involve truck freight or railways seaport drop offs will involve ship cargo being transported to land or vice versa regardless delivered at frontier shipping terms should clearly describe the location and exchange points if a seller is exporting the goods they will need to pay shipping costs to the drop off and comply with all laws governing exports which may include licensing and export filings that is usually the extent of their obligation from the border the importer takes possession of the goods and is then responsible for processing the goods through customs which includes an inspection customs filing and the initiation of any import costs and or tariffs which are paid by the importer incotermsthe international chamber of commerce is the leading organization dedicated to shipping language standardization efforts globally founded in 1919 one of the organization s first efforts was to commission a survey of the commercial trade terms used by merchants around the globe this eventually led to the compilation and publication of what is known today as the incoterms rules exporters and importers globally rely on the international chamber of commerce s incoterms publication for shipping language standardization the term delivered at frontier is used less today than in decades past as developments in global trade policy have made cross border commerce less complicated it was added to the incoterms compendium in 1967 following the third revision of the incoterms rules in 2010 the international chamber of commerce removed the term delivered at frontier from their glossary in 2011 incoterms replaced delivery at frontier with the terms delivered at terminal dat and delivered at place dap these terms have primarily superseded daf the terms are roughly comparable but dat and dap are more general and therefore more useful in an age when borders are more porous to commerce as substitutes these terms generally have the same requirements overall whether a border drop off point is called a frontier terminal or place it is very important that the shipping instructions include comprehensive details of the drop off exchange and individuals taking possession of the goods | |
what is delivered at place dap | delivered at place dap is an international trade term used to describe a deal in which a seller agrees to pay all costs and suffer any potential losses of moving goods sold to a specific location in dap agreements the buyer is responsible for paying import duties and any applicable taxes including clearance and local taxes once the shipment has arrived at the specified destination the phrase was introduced in the international chamber of commerce s icc eighth publication of its incoterms international commercial terms in 2010 1 | |
how delivered at place dap works | buyers and sellers often face complications when it comes to trade contracts whether they are in the same country or not as such there are rules and regulations in place that clearly define the roles and responsibilities of each party in a financial contract these are known as incoterms one of which is a delivered at place or dap agreement dap simply means that the seller takes on all the risks and costs of delivering goods to an agreed upon location this means they are responsible for anything associated with packaging documentation export approval loading charges and ultimate delivery the buyer in turn takes over the risk and responsibility for unloading the goods and clearing them for import a delivered at place or dap agreement is applicable for any form or combination of forms of transportation it usually lists the point at which the buyer takes on financial responsibilities such as delivered at place port of oakland the term was introduced in 2010 at that time dap replaced the term delivery duty unpaid ddu while ddu may still be used colloquially dap is now the official term used in international trade 1the opposite of dap is delivered duty paid ddp which indicates that the seller must cover duties import clearance and any taxes dap obligationsthe icc sets out clear obligations for both buyers and sellers for each incoterm below are the key responsibilities of each party the seller is the one who bears most of the responsibilities when it comes to shipping under dap contracts this includes while the seller does bear the brunt of the responsibilities under a dap contract there are certain things to which the buyer must adhere these points include inventory commercial invoicing and export paperworkexport and customs licensingpre carriage loading main carriage and delivery to destinationcost of shipment and any lossesproof of delivery to buyerpayment to sellerimport formalities and paperworkunloading cargoimport duties levies taxestransporting to next locationimportance of incotermsthe icc was founded in 1919 it established the incoterms in 1936 as a way to facilitate domestic and international trade since then the chamber released eight updates of these terms in order to remove obsolete terms delivered at place was one of those simplifications as the definition applies regardless of the method of transport 2the main driver behind the icc and the incoterms is the need for a clear understanding of counterparty responsibilities in international contracts particularly when it comes to who ships what and to where with the icc issuing concrete definitions contracts can refer to the incoterms and the signing parties have a shared understanding of responsibilities even with the clear guidelines for dap arrangements there are still situations that result in disputes such as when the carrier of the goods incurs demurrage a charge for failing to unload in time as a result of not receiving the proper clearance from one of the parties in these cases the fault usually lies with whichever party was amiss in providing timely documentation but determining that can be difficult as documentation requirements are defined by the national and local authorities controlling ports and vary from country to country indeed international trade law can be complex even with the benefit of defined contract terms | |
what does delivered at place mean | delivered at place is one of the rules set out by the international chamber of commerce relating to international trade under this rule the seller is responsible for preparing and transporting goods to the buyer s location and paying for the shipment as well as any losses that may result during transport the buyer on the other hand must bear the cost of taxes duties and levies and must unload the shipment upon arrival | |
what are incoterms | incoterms are a set of rules for international trade they are set up by the international chamber of commerce and outline the responsibilities of buyers and sellers of financial contracts in domestic and international markets as such they provide clarity when it comes to financial contracts between parties especially when they are in different countries established in 1936 incoterms are updated periodically examples of incoterms include delivered at place carriage and insurance paid to and delivered duty paid 2 | |
what s the difference between dap and ddp | dap and ddp are two incoterms used in international trade under dap or delivered at place the buyer and seller share some of the responsibilities of the shipment of goods the seller loads and ships goods to the buyer they also bear the cost of transport and must pay for any losses that may result en route once the goods arrive at the destination the buyer assumes control this means they are responsible for any taxes duties or fees and for unloading the cargo ddp or delivered duty paid works a little differently under this rule the seller takes on all of the risk responsibility and costs associated with transport this includes the cost of shipping insurance duties import and export and any other agreed upon expenses with the buyer the bottom lineinternational trade can be very complicated and tricky that s why the international chamber of commerce came up with incoterms which are a set of rules that are updated periodically this list provides guidance to buyers and sellers on their rights and responsibilities when it comes to financial contracts delivery at place is one such term under dap the seller bears much of the responsibility when it comes to the preparation and cost of shipping until the goods reach their destination upon arrival the buyer takes over | |
what is delivered duty paid ddp | delivered duty paid ddp is a delivery agreement whereby the seller assumes all of the responsibility risk and costs associated with transporting goods until the buyer receives or transfers them at the destination port this agreement includes paying for shipping costs export and import duties insurance and any other expenses incurred during shipping to an agreed upon location in the buyer s country ddp can be contrasted with ddu deliver duty unpaid investopedia jessica olahunderstanding delivered duty paid ddp delivered duty paid ddp is a shipping agreement that places the maximum responsibility on the seller in addition to shipping costs the seller is obligated to arrange for import clearance tax payment and import duty the risk transfers to the buyer once the goods are made available to the buyer at the port of destination the buyer and seller must agree on all payment details and state the name of the place of destination before finalizing the transaction 1ddp was developed by the international chamber of commerce icc which sought to standardize shipping globally hence ddp is most commonly used in international shipping transactions the benefits of ddp lean in favor of the buyer as they assume less liability and fewer costs in the shipping process this therefore places a great deal of burden on the seller 2seller s responsibilitiesthe seller arranges for transportation through a carrier of any kind and is responsible for the cost of that carrier as well as acquiring customs clearance in the buyer s country including obtaining the appropriate approvals from the authorities in that country also the seller may need to acquire a license for importation however the seller is not responsible for unloading the goods 3the seller s responsibilities include providing the goods drawing up a sales contract and related documents export packaging arranging for export clearance satisfying all import export and customs requirements and paying for all transportation costs including final delivery to an agreed upon destination 3the seller must arrange for proof of delivery and pay the cost of all inspections and must alert the buyer once the goods are delivered to the agreed upon location in a ddp transaction if the goods are damaged or lost in transit the seller is liable for the costs 3managing customsit is not always possible for the shipper to clear the goods through customs in foreign countries customs requirements for ddp shipments vary by country in some countries import clearance is complicated and lengthy so it is preferable if the buyer who has intimate knowledge of the process manages this process if a ddp shipment does not clear customs customs may ignore the fact that the shipment is ddp and delay the shipment depending on the customs decision this may result in the seller using different more costly delivery methods special considerationsddp is used when the cost of supply is relatively stable and easy to predict the seller is subject to the most risk so ddp is normally used by advanced suppliers however some experts believe that there are reasons u s exporters and importers should not use ddp 4u s exporters for example may be subject to value added tax vat at a rate of up to 20 5 moreover the buyer is eligible to receive a vat refund exporters are also subject to unexpected storage and demurrage costs that might occur due to delays by customs agencies or carriers bribery is a risk that could bring severe consequences both with the u s government and a foreign country for u s importers because the seller and its forwarder are controlling the transportation the importer has limited supply chain information also a seller may pad their prices to cover the cost of liability for the ddp shipment or markup freight bills if ddp is handled poorly inbound shipments are likely to be examined by customs which causes delays late shipments may also occur because a seller may use cheaper less reliable transportation services to reduce their costs since ddp is an important aspect of customer relationship management crm for delivery companies it s important for businesses to invest in the best crm software currently available | |
what does ddp mean for an exporter | ddp indicates that the seller exporter assumes all the risk and transportation costs the seller must also clear the goods for export at the shipping port and import at the destination moreover the seller must pay export and import duties for goods shipped under ddp | |
what is the difference between ddp and ddu | in the world of shipping delivered duty unpaid ddu simply means that it s the customer s responsibility to pay for any of the destination country s customs charges duties or taxes these must all be paid in order for customs to release the shipment after it arrives on the other hand delivered duty paid ddp means it s the shipper s responsibility to pay any of the customs charges duties and or taxes required to send the product to the destination country | |
what are the various incoterms | international commercial terms incoterms for short clarify the rules and terms buyers and sellers use in international and domestic trade contracts the incoterms include ex works exw free carrier fca carriage paid to cpt carriage and insurance paid to cip delivered at place dap delivered at place unloaded dpu delivery at frontier daf delivery ex ship dex delivered duty paid ddp deliver duty unpaid ddu free alongside ship fas free on board fob cost and freight cfr and cost insurance and freight cif 6 | |
what is delivered duty unpaid ddu | delivered duty unpaid ddu is an old international trade term indicating that the seller is responsible for the safe delivery of goods to a named destination the seller pays all transportation expenses and assumes all risks during transport the buyer becomes responsible for paying import duties when the goods arrive at the agreed upon location as well as further transport costs delivered duty paid ddp indicates that the seller must cover duties import clearance and any taxes however investopedia zoe hansenunderstanding delivered duty unpaid ddu the international chamber of commerce icc was originally formed after world war i to foster prosperity in europe by setting standards for international trade this group published a set of standardized terms for types of shipping agreements in 1936 known as incoterms 1incoterms are contract specifications that outline who bears the costs and risks of international transactions they re subject to change at the discretion of the icc the icc seeks to simplify matters for businesses by standardizing its terms because of the legal and logistical intricacies of international shipping the 2023 incoterms revision is available for purchase directly from the site delivered duty unpaid ddu isn t included in the most recent 2023 edition of the international chamber of commerce s incoterms the official term that best describes the function of ddu is now delivered at place dap 2ddu is still commonly used in international trade parlance however the term is followed by the location of delivery on paper such as ddu port of los angeles delivered at place unloaded dpu is another term used to differentiate between shipping methods the seller is also responsible for unloading the goods at the place of destination under dpu 3responsibilities under dduthe seller secures licenses and takes care of other formalities involved in exporting a good according to ddu arrangements it s also responsible for all licenses and costs incurred in transit countries as well as for providing an invoice at its own cost the seller assumes all risk until the goods are delivered to the specified location but it has no obligation to obtain insurance on the goods the buyer is responsible for obtaining all necessary licenses for importing the goods and paying all relevant taxes duties and inspection costs all risks involved in this process are borne by the buyer all further transportation costs and risks fall on the buyer when the goods are placed at the disposal of the buyer 4delivered duty unpaid ddu vs delivered duty paid ddp delivered duty unpaid ddu means that it s the customer s responsibility to pay for any of the destination country s customs charges duties or taxes these must all be paid for customs to release the shipment after it arrives delivered duty paid ddp means that it s the shipper s responsibility to pay any of the customs charges duties and or taxes that are required to send the product to the destination country advantages and disadvantages of dduthe primary benefit of delivered duty unpaid ddu shipping is that it gives the buyer more control over the shipping procedures having a higher degree of control over the process can be paramount for global buyers looking to keep a consistent flow of inventory controlling costs and tracking shipments are typically easier under ddu shipping than in ddp shipping buyers are naturally more knowledgeable of their own country s shipping customs from the seller s perspective ddu shipping provides the ability to take more of a hands off approach when it comes to the destination country s shipping rules the seller is simply responsible for getting the cargo to its destination where the buyer can handle all the legal complications there are also disadvantages to ddu shipping the biggest problem for buyers is the possibility of surprise duties or tax charges when their shipment finally arrives that s a big negative for buyers but it s not ideal for shippers either because disgruntled customers may refuse to pay for their parcel to be delivered | |
is ddu shipping or ddp shipping better | there are pros and cons to each method of shipping it ultimately boils down to what the buyer or receiver wants out of their shipping experience ddu is a good option if the receiver prioritizes control of the shipping process and doesn t mind the legal complications or surprise charges that come with more control but ddp is probably the way to go if a buyer wants a streamlined process without the possibility of any surprise charges who is responsible for ddu shipments the seller is fully responsible for the delivery of the goods to the destination country under ddu shipping rules the seller assumes all risks involved up to unloading the buyer bears the risk and cost of the unloading | |
is dap the same as ddu | delivered at place dap was introduced in 2010 to replace the term delivered duty unpaid ddu so they re essentially the same 5the bottom linefrom the seller s perspective ddu shipping provides the ability to take more of a hands off approach when it comes to the destination country s shipping rules the biggest problem for buyers in ddu shipping is the possibility of surprise duties and or tax charges when their shipment finally arrives the term delivered at place dap has been used in place of ddu since 2010 look for this updated term if you have questions regarding shipments or deliveries | |
what is delivered ex ship des | delivered ex ship des was a trade term that required a seller to deliver goods to a buyer at an agreed port of arrival the seller assumed the full cost and risk involved in getting the goods to that point after arrival the seller was considered to have met its obligation and the buyer assumed all ensuing costs and risks this term applied to both inland and sea shipping and often in charter shipping it expired effective 2011 1understanding delivered ex ship des contracts involving international transportation often contain abbreviated trade terms that describe details such as the time and place of delivery payment at what point the risk of loss shifts from the seller to the buyer and who pays for the costs of freight and insurance des was just one type of such an international trade contract des was a legal term and the exact definition differed somewhat by country typically though the seller remained responsible for products until delivery it bore the costs and risks that come with bringing goods to port the seller had total responsibility for shipping and it must pay the shipping company and purchase insurance for the goods the seller s obligation ended when it delivered the merchandise to the agreed upon port aboard the ship and not yet cleared for import buyers were responsible for all costs to receive and unload the goods and to clear them through customs international commercial terms incoterms the most commonly known trade terms are known as incoterms short for international commercial terms the international chamber of commerce icc publishes them aiming to foster global trade and commerce icc promotes and protects open markets for goods and services incoterms are often identical in form to domestic terms such as the american uniform commercial code ucc but they have different meanings parties to a contract must expressly indicate the governing law of their terms as a result delivered ex quay is another now discontinued incoterm it specified that the seller must ship the goods to the wharf or quay at the destination port des didn t cover wharves delivered ex quay could note a duty as either paid or unpaid the seller was obligated to cover costs like duties if it paid and was responsible for providing the merchandise if unpaid those obligations and responsibilities shift to the buyer replacements for delivered ex shipdelivered ex ship des was replaced in 2011 by two new terms delivered at terminal dat and delivered at place dap 1dap entails that the seller is responsible only for the packaging costs of the goods and the arrangement of the cargo for ensuring that the goods arrive safely to the point of delivery or final destination on time dat stipulates that the seller assumes all transport costs until after the goods are delivered and unloaded at the specific delivery terminal in addition the seller also assumes responsibility for export goods clearance 2delivered ex ship also differed from ex works exw another international trade term in this sort of agreement the seller makes a product available at a designated location and the buyer of the product must cover the transport costs the seller must make the goods available for pickup at its place of business in ex works all costs and risks of transportation are taken on by the buyer from there examples of delivered ex shipseller x ships contracted goods to a pier and port in kennebunkport maine midway there the ship encounters a storm and sinks seller x absorbs the loss because the shipment has not yet arrived in port alternatively seller x s shipment makes it safely to kennebunkport the storm hits while the ship is docked after the point when buyer y has contractually taken possession of the products the ship sinks in port buyer y absorbs the loss because it has accepted delivery even though the goods have not yet left the ship | |
what responsibilities did the seller have in a des transaction | the seller s responsibilities in a des transaction included delivering the goods to the named port of destination covering transportation costs and assuming risks until the goods arrive at the port however the seller was not obligated to unload the goods or clear them through customs at the destination | |
what responsibilities did the buyer have in a des transaction | the buyer s responsibilities commenced upon the goods arrival at the designated port the buyer would of had to bear the costs associated with unloading importing duties and any subsequent transportation additionally the buyer was responsible for securing and paying for any necessary insurance coverage | |
how was the risk of loss or damage handled in des | the risk of loss or damage in a des transaction is borne by the seller until the goods are delivered to the named port of destination once the goods arrive at the port the risk transferred to the buyer | |
how were transportation costs allocated in des | transportation costs in a des transaction were primarily the responsibility of the seller the seller covered the expenses associated with transporting the goods to the named port of destination any additional transportation costs beyond the port generally became the responsibility of the buyer the bottom linedelivered ex ship was an international trade term indicating that the seller was responsible for delivering the goods to a named port of destination covering transportation costs and risks until the goods arrive upon arrival at the designated port the buyer assumed responsibility for unloading customs clearance and any subsequent transportation | |
what is delivery versus payment dvp | delivery versus payment dvp is a securities industry settlement method that guarantees the transfer of securities only happens after payment has been made dvp stipulates that the buyer s cash payment for securities must be made prior to or at the same time as the delivery of the security delivery versus payment is the settlement process from the buyer s perspective from the seller s perspective this settlement system is called receive versus payment rvp dvp rvp requirements emerged in the aftermath of institutions being banned from paying money for securities before the securities were held in negotiable form dvp is also known as delivery against payment dap delivery against cash dac and cash on delivery understanding delivery versus payment dvp the delivery versus payment settlement system ensures that delivery will occur only if payment occurs the system acts as a link between a funds transfer system and a securities transfer system from an operational perspective dvp is a sale transaction of negotiable securities in exchange for cash payment that can be instructed to a settlement agent using swift message type mt 543 in the iso15022 standard 1the use of such standard message types is meant to reduce risk in the settlement of a financial transaction and allow for automatic processing ideally the title to an asset and payment are exchanged simultaneously this may be possible in many cases such as in a central depository system such as the united states depository trust corporation | |
how delivery versus payment works | a significant source of credit risk in securities settlement is the principal risk associated with the settlement date the idea behind the rvp dvp system is that part of that risk can be removed if the settlement procedure requires that delivery occurs only if payment occurs in other words that securities are not delivered prior to the exchange of payment for the securities the system helps to ensure that payments accompany deliveries thereby reducing principal risk limiting the chance that deliveries or payments would be withheld during periods of stress in the financial markets and reducing liquidity risk by law institutions are required to demand assets of equal value in exchange for the delivery of securities 2 the delivery of the securities is typically made to the bank of the buying customer while the payment is made simultaneously by bank wire transfer check or direct credit to an account delivery versus payment dvp is a settlement method that requires that securities are delivered to a particular recipient only after payment is made special considerationsfollowing the october 1987 worldwide drop in equity prices central banks in the group of ten strengthened settlement procedures to eliminate the risk that securities were delivered without payment the dvp procedure reduces or eliminates the counterparties exposure to this principal risk 3 | |
what is the delphi method | the delphi method is a forecasting process and structured communication framework based on the results of multiple rounds of questionnaires sent to a panel of experts after each round of questionnaires the experts are presented with an aggregated summary of the last round allowing each expert to adjust their answers according to the group response this process combines the benefits of expert analysis with elements of the wisdom of crowds understanding the delphi methodseveral rounds of questionnaires are sent out to the group of experts and the anonymous responses are aggregated and shared with the group after each round the experts are allowed to adjust their answers in subsequent rounds based on how they interpret the group response that has been provided to them since multiple rounds of questions are asked and the panel is told what the group thinks as a whole the delphi method seeks to reach the correct response through consensus the delphi method was originally conceived in the 1950s by olaf helmer and norman dalkey of rand corp the name refers to the oracle of delphi a priestess at the temple of apollo in ancient greece known for her prophecies the delphi method allows experts to work toward a mutual agreement by conducting a circulating series of questionnaires and releasing related feedback to further the discussion with each subsequent round the experts responses shift as rounds are completed based on the information brought forth by other experts participating in the analysis 1the delphi method is a process of arriving at group consensus by providing experts with rounds of questionnaires as well as the group response before each subsequent round delphi method processfirst the group facilitator selects a group of experts based on the topic being examined once all participants are confirmed each member of the group is sent a questionnaire with instructions to comment on each topic based on their personal opinion experience or previous research the questionnaires are returned to the facilitator who groups the comments and prepares copies of the information a copy of the compiled comments is sent to each participant along with the opportunity to comment further at the end of each comment session all questionnaires are returned to the facilitator who decides if another round is necessary or if the results are ready for publishing the questionnaire rounds can be repeated as many times as necessary to achieve a general sense of consensus advantages of the delphi methodthe delphi method seeks to aggregate opinions from a diverse set of experts and it can be done without having to bring everyone together for a physical meeting since the responses of the participants are anonymous individual panelists don t have to worry about repercussions for their opinions the anonymity of the participants also helps prevent the halo effect which sees higher priority given to the views of more powerful or higher ranking members of the group 2by conducting delphi studies consensus can be reached over time as opinions are swayed making the method very effective in contrast with many other types of interviews and focus groups delphi studies allow participants to rethink and refine their opinions based on the input of others contributing to a more reflective and thoughtful process 2disadvantages of the delphi methodalthough it provides the benefits of anonymity and the possibility for reevaluation and reflection the delphi method does not result in the same sort of interactions as a live discussion a live discussion can sometimes produce a better example of consensus as ideas and perceptions are introduced broken down and reassessed response times with the delphi method can be long which slows the rate of discussion it is also possible that the information received back from the experts will provide no innate value the deliberate and drawn out nature of the delphi method also presents some challenges since the method often requires multiple rounds of questionnaires there is a chance that some participants may drop out from the study before it has been completed in addition while there are benefits to giving participants the opportunity to reassess their views there is a chance that they will adjust their responses so that they are more closely aligned with the views of the majority reducing the diversity of opinions represented and diminishing the validity of the results 2applications of the delphi methodlet s take a look at some general examples of when and how the delphi method can be applied this list is not meant to be exhaustive but consider these options real world example of the delphi methodthe objective of one medical study was to develop guidelines for monitoring high risk medications 3 the study aimed to assess the prevalence of laboratory testing as part of the study guidelines an advisory committee of national experts and local leaders employed a two round internet based delphi process to identify key medications that require monitoring the delphi method achieved consensus on the medications to be included in the guidelines within those two rounds the guidelines covered 35 drugs or drug classes and 61 lab tests the findings bring some attention to the fact that despite general agreement on the importance of laboratory monitoring for high risk medications actual monitoring practices are inconsistent therefore the study found that even though there was a positive general consensus towards lab monitoring there was some variability to this alternatives to the delphi methodif the delphi method doesn t quite sound like the methodology for you there are many other similar yet technically different methods below are some alternative examples | |
what is the delphi method used for | the delphi method is used to establish a consensus opinion about an issue or set of issues by seeking mutual agreement from a group of experts in the relevant field the delphi method has been used to conduct research in numerous areas from the defense industry to healthcare 2 | |
how is the delphi method conducted | the group facilitator selects a group of experts based on the topic being examined and sends them a questionnaire with instructions to comment on each topic based on their personal opinion experience or previous research the facilitator groups the comments from the returned questionnaires and sends copies to each participant along with the opportunity to comment further at the end of this session the questionnaires are returned to the facilitator who decides if another round is necessary or if the results are ready for publishing this process can be repeated multiple times until a general sense of consensus is reached | |
how is consensus defined when using the delphi method | although the delphi method seeks to pinpoint an area of mutual agreement among the pool of experts it is unlikely that the participants will be in complete agreement on all issues even after several rounds of questionnaires and opportunities for reassessment researchers applying the delphi method may have different thresholds for exactly what constitutes a consensus and some critics of the method point to the subjective nature of this determination as a shortcoming 2 | |
how many rounds are generally conducted in a delphi study | generally a delphi study is conducted in two to four rounds the exact number of rounds will vary depending on the study s objectives and the complexity of the issue being addressed with a higher number of rounds needed for more advanced topics the bottom linethe delphi method uses multiple rounds of questionnaires sent to a panel of experts to work toward a mutual agreement or consensus opinion the participants modify their responses based on the information brought forth by other experts participating in the analysis the delphi method benefits from the anonymity of the participants and the opportunities it provides for reassessment but it can also be time consuming and in some cases may be less effective than a live discussion or focus group | |
what is delta | delta is a risk metric that estimates the change in the price of a derivative such as an options contract given a 1 change in its underlying security it is represented by the symbol the delta also tells options traders the hedging ratio to become delta neutral a third interpretation of an option s delta is the probability that it will finish in the money delta values can be positive or negative depending on the type of option investopedia mira norianunderstanding deltadelta is an important variable related to the directional risk of an option and is produced by pricing models used by options traders as noted above it is represented by the symbol professional option sellers determine how to price their options based on sophisticated models that often resemble the black scholes model 1delta is a key variable within these models to help option buyers and sellers alike because it can help investors and traders determine how option prices are likely to change as the underlying security varies in price the calculation of the delta is done in real time by computer algorithms that continuously publish delta values to broker clientele the delta value of an option is often used by traders and investors to inform their choices for buying or selling options delta values can be either positive or negative according to the type of option the behavior of call and put option delta is highly predictable and is very useful to portfolio managers traders hedge fund managers and individual investors this is explored a little further down an option with a delta of 0 50 is at the money delta vs delta spreaddelta spreading is an options trading strategy in which the trader initially establishes a delta neutral position by simultaneously buying and selling options in proportion to the neutral ratio that is the positive and negative deltas offset each other so that the overall delta of the assets in question totals zero using a delta spread a trader usually expects to make a small profit if the underlying security does not change widely in price however larger gains or losses are possible if the stock moves significantly in either direction the most common tool for implementing a delta spread strategy is an option trade known as a calendar spread the calendar spread involves constructing a delta neutral position using options with different expiration dates for instance a trader sells near month call options and buys call options at the same time with a later expiration in proportion to their neutral ratio since the position is delta neutral the trader should not experience gains or losses from small price moves in the underlying security the trader expects the price to remain unchanged and as the near month calls lose time value and expire the trader can sell the call options with longer expiration dates and net a profit the deeper in the money the call option the closer the delta will be to 1 and the more the option will behave like the underlying asset call and put option deltascall option delta behavior depends on whether the option is the delta for a call option always ranges from 0 to 1 because as the underlying asset increases in price call options increase in price put option deltas always range from 1 to 0 because as the underlying security increases the value of put options decreases 2put option delta behaviors also depend on whether the option is the deeper in the money the put option the closer the delta will be to 1 if a put option has a delta of 0 33 and the price of the underlying asset increases by 1 the price of the put option will decrease by 33 cents 2 technically the value of the option s delta is the first derivative of the value of the option with respect to the underlying security s price delta is often used in hedging strategies and is also referred to as a hedge ratio 3an option s gamma is its change in delta given a 1 change in the underlying security examples of deltalet s assume there is a publicly traded company called bigcorp shares of its stock are bought and sold on a stock exchange and there are put options and call options traded for those shares the delta for the call option on bigcorp shares is 0 35 that means that a 1 change in the price of bigcorp stock generates a 35 cent increase in the price of bigcorp call options thus if bigcorp s shares trade at 20 and the call option trades at 2 a change in the price of bigcorp s shares to 21 means the call option will increase to a price of 2 35 put options work in the opposite way that is if the put option on bigcorp shares has a delta of 0 65 then a 1 increase in bigcorp s share price generates a 65 cent decrease in the price of bigcorp s put options so if bigcorp s shares trade at 20 and the put option trades at 2 then bigcorp s shares increase to 21 and the put option will decrease to a price of 1 35 | |
how do options traders use delta | delta is used by options traders in several ways first it tells them their directional risk in terms of how much an option s price will change as the underlying price changes it can also be used as a hedge ratio to become delta neutral for instance if an options trader buys 100 xyz calls each with a 0 40 delta they would sell 4 000 shares of stock to have a net delta of zero equity options contracts represent 100 shares of stock each if they instead bought 100 puts with a 0 30 delta they would buy 3 000 shares 4 | |
what is a portfolio delta | traders that have several options positions can benefit from looking at the overall delta of their portfolio or book if you are long one call with a 0 10 delta and two calls with a 0 30 delta your total book s delta would be 0 70 if you then bought a 0 70 delta put the position would become delta neutral | |
what is the delta of a share of stock | being long a share of stock is always 1 0 delta and being short stock a delta of 1 0 the bottom linederivatives are financial contracts whose value depends on an underlying security or benchmark these contracts can be used to trade any type of security including stocks commodities and currencies but they do come with certain risks traders who deal with derivatives should understand these risks and how to measure them for instance knowing how to interpret delta can mean the difference between realizing gains and losses remember delta is a risk metric that indicates changes in a derivative s price based on the price of the underlying security | |
what is delta hedging | delta hedging is an options trading strategy that aims to reduce or hedge the directional risk associated with price movements in the underlying asset the approach uses options to offset the risk to either a single other option holding or an entire portfolio of holdings the investor tries to reach a delta neutral state and not have a directional bias on the hedge investopedia jake shi | |
how delta hedging works | the most basic type of delta hedging involves an investor who buys or sells options and then offsets the delta risk by buying or selling an equivalent amount of stock or exchange traded fund etf shares investors may want to offset their risk of moving in the option or the underlying stock by using delta hedging strategies more advanced options strategies seek to trade volatility through the use of delta neutral trading strategies since delta hedging attempts to neutralize or reduce the extent of the move in an option s price relative to the asset s price it requires a constant rebalancing of the hedge delta hedging is a complex strategy mainly used by institutional traders and investment banks the delta represents the change in the value of an option in relation to the movement in the market price of the underlying asset hedges are investments usually options taken to offset any exposure to the risk of an asset delta is a ratio between the change in the price of an options contract and the corresponding movement of the underlying asset s value so if a stock option for xyz shares has a delta of 0 45 if the underlying stock increases in market price by 1 per share the option value on it will rise by 0 45 per share all else being equivalent let s assume the options discussed have equities as their underlying security traders want to know an option s delta since it can tell them how much the value of the option or the premium will rise or fall with a move in the stock s price the theoretical change in premium for each 1 change in the price of the underlying is the delta while the relationship between the two movements is the hedge ratio the delta of a call option ranges between zero and one while the delta of a put option ranges between negative one and zero the price of a put option with a delta of 0 50 is expected to rise by 50 cents if the underlying asset falls by 1 the opposite is true as well for example the price of a call option with a hedge ratio of 0 40 will rise 40 of the stock price move if the price of the underlying stock increases by 1 delta is dependent on if it is a put option with a delta of 0 50 is considered at the money meaning the strike price of the option is equal to the underlying stock s price conversely a call option with a 0 50 delta has a strike that s equal to the stock s price 1reaching delta neutralan options position could be hedged with options exhibiting a delta that is opposite to that of the current options holding to maintain a delta neutral position a delta neutral position is one in which the overall delta is zero which minimizes the options price movements in relation to the underlying asset for example assume an investor holds one call option with a delta of 0 50 which indicates the option is at the money and wishes to maintain a delta neutral position the investor could purchase an at the money put option with a delta of 0 50 to offset the positive delta which would make the position have a delta of zero delta gamma hedging is closely related to delta hedging it is an options strategy that combines both delta and gamma hedges to mitigate the risk of changes in the underlying asset and in the delta itself a brief primer on optionsthe value of an option is measured by the amount of its premium which is the fee paid for buying the contract by holding the option the investor or trader can exercise their rights to buy or sell 100 shares of the underlying asset but are not required to perform this action if it is not profitable to them the price they will buy or sell at is known as the strike price and is set along with the expiration date at the time of purchase each contract equals 100 shares of the underlying stock or asset holders of american style options may exercise their rights at any time up to and including the expiration date european style options allow the holder to exercise only on the expiration date also depending on the value of the option the holder of either style of options may decide to sell their contract to another investor before expiration 2for example if a call option has a strike price of 30 and the underlying stock is trading at 40 at expiry the option holder can convert 100 shares at the lesser strike price of 30 if they choose they may then turn around and sell them on the open market for 40 for a profit the profit would be 10 less the premium for the call option and any fees from the broker for placing the trades put options are a bit more confusing but work in much the same way as the call option here the holder expects the value of the underlying asset to deteriorate before the expiration they may either hold the asset in their portfolio or borrow the shares from a broker 3delta hedging with equitiesan options position could also be delta hedged using shares of the underlying stock one share of the underlying stock has a delta of one as the stock s value changes by 1 for example assume an investor is long one call option on a stock with a delta of 0 75 or 75 since options have a multiplier of 100 in this case the investor could delta hedge the call option by shorting 75 shares of the underlying stocks in shorting the investor borrows shares sells those shares at the market to other investors and later buys shares to return to the lender at a hopefully lower price 4advantages and disadvantages of delta hedgingdelta hedging can benefit traders when they anticipate a strong move in the underlying stock but run the risk of being over hedged if the stock doesn t move as expected if over hedged positions have to unwind the trading costs increase one of the primary drawbacks of delta hedging is the necessity of constantly watching and adjusting the positions involved depending on the movement of the stock the trader has to frequently buy and sell securities to avoid being under or over hedged the number of transactions involved in delta hedging can become expensive since trading fees are incurred as adjustments are made to the position it can be particularly expensive when the hedging is done with options as these can lose time value sometimes trading lower than the underlying stock has increased time value is a measure of how much time is left before an option s expiration whereby a trader can earn a profit as time goes by and the expiration date draws near the option loses time value since there s less time remaining to make a profit as a result an option s time value impacts the premium cost for that option since options with a lot of time value typically have higher premiums than those with little time value as time goes by the value of the option changes which can result in the need for increased delta hedging to maintain a delta neutral strategy 5allows traders to hedge the risk of adverse price changes in a portfolioprotects profits from an option or stock position in the short term without unwinding the long term holdingnumerous transactions might be needed to constantly adjust the delta hedge leading to costly feesover hedging may occur if the delta is offset by too much or the markets change unexpectedlyexample of delta hedginglet s assume a trader wants to maintain a delta neutral position for investment in the stock of general electric ge the investor owns or is long one put option on ge one option represents 100 shares of ge s stock the stock declines considerably and the trader has a profit on the put option then recent events push the stock s price higher however the trader sees this rise as a short term event and expects the stock to fall again as a result a delta hedge is put in place to help protect the gains in the put option ge s put option has a delta of 0 75 which is usually referred to as 75 the investor establishes a delta neutral position by purchasing 75 shares of the underlying stock at 10 per share the investor buys 75 shares of ge at the cost of 750 in total once the stock s recent rise has ended or events have changed in favor of the trader s put option position the trader can remove the delta hedge | |
how does delta hedging work | delta hedging is a trading strategy that involves options traders use it to hedge the directional risk associated with changes in the price of the underlying asset by using options this is usually done by buying or selling options and offsetting the risk by buying or selling an equal amount of stock or etf shares the aim is to reach a delta neutral state without a directional bias on the hedge can you use delta to determine how to hedge options yes you can use delta to hedge options in order to do this you must figure out whether you should buy or sell the underlying asset you can determine the quantity of the delta hedge by multiplying the total value of the delta by the number of options contracts involved take this figure and multiply that by 100 to get the final result | |
what is delta gamma hedging | delta gamma hedging is an options strategy it is closely related to delta hedging in delta gamma hedging delta and gamma hedges are combined to cut down on the risk associated with changes in the underlying asset it also aims to reduce the risk in the delta itself remember that delta estimates the change in the price of a derivative while gamma describes the rate of change in an option s delta per one point move in the price of the underlying asset the bottom lineoptions traders have a range of strategies to help mitigate the risks involved with these investments one of these is delta hedging when a trader uses this strategy their goal is to reduce the directional risk associated with price movements of the underlying asset this is accomplished by buying or selling options and offsetting the risk by buying or selling the same amount of shares of a company s stock or etf although it can be an advantageous strategy for those who know how to use it traders should be aware that it does require constant monitoring and can be fairly expensive | |
what is delta neutral | delta neutral is a portfolio strategy with multiple positions balancing positive and negative deltas so that the overall delta of the assets is zero options traders use delta neutral strategies to profit from implied volatility or the time decay of options these strategies are also used for hedging below we explain this strategy for novices and more experienced traders alike understanding delta neutralunderstanding the concept of delta is crucial in options trading delta one of the greeks in finance measures how sensitive an option s price is to changes in the price of the underlying asset more specifically delta measures how much an option s price is expected to change for a 1 00 change in the price of the underlying security for example a call option with a delta of 0 25 and worth 1 40 would be expected to have a value of 1 65 if the underlying asset moved 1 00 higher a portfolio s delta can be positive negative or neutral depending on the positions held investors aiming for a delta neutral portfolio want to balance these deltas so that the overall delta of the portfolio is zero this balancing act means that small incremental moves up or down in the underlying asset price would not cause any changes to the portfolio 1 however large price swings changes in volatility and the passage of time can still affect the value of the portfolio getting to delta neutral often means making continual adjustments since the delta might shift away from zero from changes in the market | |
how delta neutral works | a positive delta means the option s price will increase when the stock price increases and decrease when the stock price decreases conversely a negative delta means the option s price will decrease as the stock price increases and increase when the stock price decreases let s get some more terms out of the way before laying out this strategy we can now move through how a delta neutral strategy getting a delta of zero would work suppose you have a long position in a stock delta of 1 to make this position delta neutral you could buy a put option on the same stock with a delta range from 1 to 0 this behavior is seen with deep in the money call options if the stock s price increases by 1 the long position will gain 1 because of the 1 delta however the price of the put option will decrease offsetting the gain from the long position this ensures that the portfolio s overall value remains unchanged despite the stock s change in price likewise if an option has a delta of zero and the stock increases by 1 the option s price won t increase at all a behavior seen with deep out of the money call options if an option has a delta of 0 5 its price will increase by 0 50 for every 1 increase in the underlying stock this is because the delta 0 5 is multiplied by the change in the stock s price 1 resulting in a 0 50 change in the option s price suppose you have a stock position of 200 shares of company x trading at 100 per share that you believe will increase in price over the long term you are worried though that prices could drop in the short term so you decide to set up a delta neutral position to hedge this directional risk being long 200 shares of stock means that your delta is 200 you can find options contracts providing the opposite delta exposure to cancel that out i e 200 say that you find an at the money put option on company x with a delta of 0 50 the sign is negative because put options gain value as the underlying price declines and lose value when it rises options on stocks represent 100 shares of the underlying asset so buying one company x put would provide you with the following 0 50 100 50 deltas if you bought four of these put options you would have a total delta as follows 400 0 5 200 with the combined position of 200 company x shares and long 4 at the money put options on company x your overall position would not be zero i e delta neutral while an initial delta hedge can set up a neutral position as the underlying stock moves the delta of the options used will also change this is known as the option s gamma as a result traders who want to maintain delta neutrality need to monitor and adjust their positions to reestablish canceling deltas this process is known as dynamic hedging pros and cons of delta neutral positionshedges against small price movements in either directionallows options traders to focus on nondirectional strategiesflexibility in establishing delta neutral positionslarge sudden moves can produce directional exposure because of gammacan be costly and time consuming to monitor and adjustthe primary benefit of a delta neutral position is that it s immune to small changes in the price of the underlying asset either up or down this strategy is about betting on the direction in which the stock price will move and not about having to worry about minor fluctuations in price delta neutral traders often seek to profit from options time decay represented by the greek theta or changes in implied volatility the greek vega and not the directional movements in the stock since delta neutrality focuses on offsetting price movement risks traders can focus on these other factors affecting the option s value however being delta neutral also means missing out on those price movements so it does present a sort of opportunity cost for some traders even if you are not concerned about these price changes maintaining a delta neutral position as the underlying moves requires active monitoring and adjusting which can be costly and not well suited for inexperienced traders in addition large unexpected market moves can lead to substantial losses since the position is neutral only to small price movements so significant and sudden market events can undo the strategy | |
how does delta hedging work | delta hedging minimizes the directional risk associated with changes in the price of the underlying asset by using offsetting positions in options contracts this is usually done by buying or selling options with an equal but opposite exposure to the underlying asset by doing so gains losses in the underlying asset will be offset by equal losses gains in the options position can you use either calls or puts to be delta neutral yes if you own shares of stock you can buy puts or sell calls you can also create delta neutral positions from options alone such as being long an at the money straddle where you would buy one 0 50 delta call and one 0 50 delta put | |
how can options traders profit from a delta neutral position | options traders can profit from delta neutral positions by selling options and collecting the time decay as time passes by eliminating exposure to small price fluctuations this strategy can be sharpened likewise traders may bet that the underlying asset s volatility will rise or fall in the future a delta neutral position allows such a trader to isolate the volatility figure from the market direction the bottom linedelta neutral occurs when a trader s net positions are hedged against changes in market price either up or down this is done by offsetting the deltas of one financial instrument with that of others this balance means that small movements in the underlying asset s price will have little to no impact on the overall value of the combined position e g stock plus options the idea is that the gain on one side of the position offsets the loss on the other however it s important to remember that delta is not static it changes as the market moves gamma and time passes therefore maintaining a delta neutral position often requires continual adjustments known as dynamic hedging | |
what is demand | demand is an economic concept that relates to a consumer s desire to purchase goods and services and willingness to pay a specific price for them an increase in the price of a good or service tends to decrease the quantity demanded likewise a decrease in the price of a good or service will increase the quantity demanded demand is a concept that consumers and businesses are very familiar with because it makes sense and occurs naturally in the course of practically any day for example shoppers with an eye on products that they want will buy more when the products prices are low when something happens to raise the prices such as a change of season shoppers buy fewer or perhaps none at all generally speaking there is market demand and aggregate demand market demand is the total quantity demanded by all consumers in a market for a given good aggregate demand is the total demand for all goods and services in an economy multiple stocking strategies are often required to handle demand investopedia paige mclaughlinunderstanding demandbusinesses can spend a considerable amount of money to determine the amount of demand the public has for their products and services how many of their goods will they actually be able to sell at any given price incorrect estimations can result in lost sales from willing buyers if demand is underestimated or losses from leftover inventory if demand is overestimated demand helps fuel profits and the economy that s why it s an important concept demand is closely related to the concept of supply while consumers try to pay the lowest prices they can for goods and services suppliers try to maximize profits if suppliers charge too much for a product the quantity demanded drops and suppliers may not sell enough product to earn sufficient profits if suppliers charge too little the quantity demanded increases but lower prices may not cover suppliers costs or allow for profits some factors affecting demand include the appeal of a good or service the availability of competing goods the availability of financing and the perceived availability of a good or service demand elasticity relates to how sensitive the demand for a product is as the price for it changes for example if there s a big change in demand due to a small change in price demand elasticity is said to be high shoppers may choose attractive substitute products if the price for their usual product has increased somewhat that could indicate high demand elasticity and is useful for businesses to know determinants of demandthere are five main factors that drive demand as these factors change so can the demand for a product or service in fact they change all the time so demand can be constantly in flux the law of demandthe law of demand states that when prices rise demand will fall when prices fall demand will rise the law of demand is simply an expression of the inverse relationship between price and demand it involves price only none of the other drivers of demand mentioned above are involved if they do come into play the functioning of the law can be affected demand can be seen to change for reasons other than price demand curvea demand curve is a graph that displays the change in demand resulting from a change in price it s a visual representation of the law of demand the demand curve can be a useful tool for businesses because it can show them the prices at which consumers start buying less or more it can point out prices at which a company can maintain consumer demand and support reasonable profits on the demand curve graph the vertical axis denotes the price while the horizontal axis denotes the quantity demanded a demand schedule or table created by a business that lists the quantity of a product that consumers will buy at particular price points can provide the figures for the demand curve chart once plotted the demand curve slopes downward from left to right as prices increase consumers demand less of a good or service a supply curve slopes upward as prices increase suppliers provide more of a good or service market equilibriumthe point where supply and demand curves intersect represents the market clearing or market equilibrium price an increase in demand shifts the demand curve to the right the two curves then intersect at a higher price which means consumers are willing to pay more for the product equilibrium prices typically change for most goods and services because factors affecting supply and demand are always changing free competitive markets tend to push prices toward market equilibrium market demand vs aggregate demandthe market for each good in an economy faces a different set of circumstances which vary in type and degree in macroeconomics we also look at aggregate demand in an economy aggregate demand refers to the total demand by all consumers for all goods and services in an economy across all the markets for individual goods since aggregate demand includes all goods in an economy it is not sensitive to competition or the substitution of goods nor is it to changes in consumer preferences between various goods demand in individual goods markets can be affected by these factors macroeconomic policy and demandfiscal and monetary authorities such as the federal reserve devote much of their macroeconomic policy making to managing aggregate demand if the fed wants to reduce demand it can raise interest rates and increase prices by curtailing the growth of the money supply and credit if it needs to increase demand the fed can lower interest rates and increase the money supply giving consumers and businesses more money to spend 1in certain cases even the fed can t fuel demand when unemployment is on the rise people may not be able to afford to spend or take on cheaper debt even with low interest rates | |
what is meant by demand | the economic principle of demand concerns the quantity of a particular product or service that consumers are willing to purchase at various prices demand looks at a market s pricing and purchases from a consumer s point of view on the other hand the principle of supply underscores the point of view of the supplier of the product or service | |
what is the demand curve | the demand curve is a graphical representation of the law of demand it plots prices on a chart the line that connects those prices is the demand curve the vertical axis represents prices of products the horizontal axis represents product quantity typically the curve starts on the left side high up the vertical axis and descends across the chart to the right the slope indicates that as prices decrease demand as shown by growing number of products purchased increases | |
what is the importance of demand | economically speaking the principle of demand has importance for both consumers and businesses that sell products and or services for businesses understanding demand is vital when making decisions about inventory pricing and aiming for a particular profit consumers who have an understanding of demand can make confident decisions about what products to buy and when to buy them | |
what is the demand curve | the demand curve is a graphical representation of the relationship between the price of a good or service and the quantity demanded for a given period of time in a typical representation the price appears on the left vertical axis while the quantity demanded is on the horizontal axis a demand curve doesn t look the same for every product or service when the price rises demand generally falls for almost any good but the drop is much greater for some goods than for others this is a reflection of the price elasticity of demand a measurement of the change in consumption of a product in relation to a change in its price the elasticity of demand for products varies between and within product categories depending on the product s substitutability understanding the demand curveas noted above the demand curve is a commonly used graph that represents the relationship between prices and the total quantity of goods and services demanded over a certain period of time prices normally appear on the y axis while demand is depicted on the x axis this curve generally moves downward from the left to the right this movement expresses the law of demand which states that as the price of a given commodity increases the quantity demanded decreases as long as all else is equal note that this formulation implies that price is the independent variable and quantity is the dependent variable in most disciplines the independent variable appears on the horizontal or x axis but economics is an exception to this rule for example if the price of corn rises consumers will have an incentive to buy less corn and substitute other foods for it so the total quantity of corn that consumers demand will fall types of demand curvesthere are two types of demand curves an individual demand curve and a market demand curve an individual demand curve is one that examines the price quantity relationship for an individual consumer or how much of a product an individual will buy given a particular price let s say the price of a slice of pizza is 1 50 and joel is accustomed to buying four slices for lunch every workday 4 x 1 50 x 5 30 if the price drops to 1 a slice four slices will cost joel 20 4 x 1 x 5 and joel might demand six slices instead of four but if the price drops to 75 cents a slice he might demand eight slices a day with the price information and the number of slices joel will demand at that price it would be possible to plot an individual demand curve the demand curve plots out the demand for an individual consumer hence the name individual demand curve but they don t take entire markets into account that s where the market demand curve comes in a market demand curve is the summation of the individual demand curves in a given market it shows the quantity of a good demanded by all individuals at varying price points keep in mind that this graph doesn t outline what consumers want rather it depicts the goods and services they ll buy if they have the purchasing power to do so determining the market demand curve is as easy as adding up all of the individual demand curves this is then plotted along the horizontal or x axis of the graph unlike individual demand curves which are generally steeper market demand curves tend to be flatter that s because demand in the market is more proportionate as prices change compared to changes in individual demand businesses can use the market demand curve to help determine whether their goods and services are properly priced according to consumer demand demand elasticitythe degree to which rising price translates into falling demand is called demand elasticity or price elasticity of demand if a 50 rise in corn prices causes the quantity of corn demanded to fall by 50 the demand elasticity of corn is 1 if a 50 rise in corn prices only decreases the quantity demanded by 10 the demand elasticity is 0 2 elasticity measures how demand shifts when economic factors change when demand remains constant regardless of price changes it is called inelasticity the demand curve is shallower closer to the horizontal axis for products with more elastic demand goods with more elastic demand are those for which a change in price leads to a significant shift in demand elastic goods include luxury products and consumer discretionary items such as a brand of candy bar or cereal food items are easily substituted and brand name products are easily replaced by items that are lower in price the demand curve for items that are less elastic or inelastic is steeper closer to the vertical axis inelastic goods are generally necessities for which there are few if any substitutes common examples are utilities prescription drugs and tobacco products demand often remains constant for these items despite price changes factors that shift the demand curveif a factor besides price or quantity changes a new demand curve needs to be drawn for example say that the population of an area explodes increasing the number of mouths to feed in this scenario more corn will be demanded even if the price remains the same meaning that the curve itself shifts to the right d2 in the graph below in other words demand will increase other factors can shift the demand curve as well such as a change in consumers preferences for instance exceptions to the demand curvethere are some exceptions to the rules that apply to the relationship that exists between prices of goods and demand two of these are giffen goods and veblen goods a giffen good is a non luxury product for which demand increases when the price increases defying standard demand laws the term often refers to low income products for which there are no viable substitutes for example a staple food like bread or rice the demand for these goods is on an upward slope which goes against the laws of demand therefore the typical response rising prices triggering a substitution effect won t exist for giffen goods and the price rise will continue to push demand veblen goods are those for which demand rises even as the price rises because of the exclusive nature and appeal of these products as status symbols like the demand curve for a giffen good a veblen good has an upward sloping demand curve in contrast to the usual downward sloping curve veblen goods are generally luxury items such as cars yachts fine wines and designer jewelry that are high quality and out of reach for the majority of consumers it is named after american economist thorstein veblen who is best known for introducing the term conspicuous consumption 1 | |
what is the law of demand | this is a fundamental economic principle that holds that the quantity of a product purchased varies inversely with its price in other words the higher the price the lower the quantity demanded and at lower prices consumer demand increases the law of demand works with the law of supply to explain how market economies allocate resources and determine the price of goods and services in everyday transactions | |
what is the difference between a demand curve and a supply curve | a demand curve represents the relationship between the price of a good or service and the quantity demanded for a given period of time typically as the price rises the demand falls as a result the curve slopes down from left to right a supply curve is a graphic representation of the correlation between the cost of a good or service and the quantity supplied for a given time period typically as the price of a product increases the quantity supplied also increases the resultant curve slopes upward from left to right | |
does the demand curve slope downward or upward | the demand curve generally slopes downward from left to right illustrating that as the price of a good rises the demand for it falls however there are exceptions to the rule for giffen goods and veblen goods for example in both cases rising prices tend to accompany a rise in demand leading to a demand curve that rises from left to right the bottom linea demand curve is a graphic display of the change in demand for a good resulting from a change in price in a given time period on the demand curve graph the vertical axis denotes the price and the horizontal axis denotes the quantity demanded a demand curve can be a useful business tool because it can show the prices at which consumers start buying less or more it can also point out the prices at which a company can maintain consumer demand and earn reasonable profits | |
what is a demand deposit | a demand deposit account dda is a bank account from which deposited funds can be withdrawn at any time without advance notice dda accounts can pay interest on the deposited funds but aren t required to checking accounts and savings accounts are common types of ddas investopedia ellen lindner |
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