The importance of ENTRY PRICES

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The Importance of Basis Point Value (BPV)

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A basis point is a unit of measure used in finance to describe the percentage change in the value or rate of a financial instrument.

One basis point is equivalent to 0.01% (1/100 of a percent) or 0.0001 in decimal form. If interest rates rose from 2.00% to 2.50%, it would be said that rates rose 50 basis points. In many cases, basis point refers to changes in short-term interest rates, such as Eurodollars, but it is also important with longer-term bond yields.

Basis Point Value, also known as DV01 (the dollar value of a one basis point move) represents the change in the value of an asset due to a 0.01% change in the yield.

BPV or DV01 calculations are used in many ways, but primarily to show the dollar amount of change for each increase or decrease in interest rates. If the value of the Eurodollar futures contract moves by one basis point (.01%), it would equate into a $25.00 move in the contract value. If Eurodollar futures moved four basis points or .04%, it would equate to a $100 move in the value of the contract.

Show graphic calculating this BPV or DV01 for Eurodollars:

Basis Point Value Calculation

The face value of the Eurodollar futures contract is $ 1,000,000. The futures track three-month Eurodollar rates (three-month ICE LIBOR) hence we use 90 days in the equation, and .01% in decimal form is .0001.

Basis Point Value (BPV) = Face Value x (#days ÷ 360) x .01%

BPV = 1,000,000 x (90 ÷ 360) x .0001

Example

This example shows Eurodollars in terms of the IMM Price index. Assume Eurodollar interest rates rose from 1.00% to 1.05%, this would represent a .05% or five basis point rise in Eurodollar interest rates. But remember from the prior modules that Eurodollar futures are priced off the IMM price index.

IMM price index = 100 – Eurodollar rate (or three month ICE LIBOR)

In the example above, Eurodollars were at 1.00%. The IMM price index, therefore, would be 100 – 1.00 = 99.00. Subsequently, interest rates rose to 1.05%. The IMM price index at that point would be 100 – 1.05 = 98.95.

As you can see, interest rate prices move inversely with interest rate yields. As rates rose five basis points, the Eurodollar IMM price index declined from 99.00 to 98.95.

To find out how much that means in terms of dollar value, we have to convert basis point movement into dollar movement. This requires knowing the DV01 (dollar Value of a .01 move)

The basis point value in Eurodollar futures from our calculation above is $25.00. Therefore, a five basis point move equates to $125.00

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5 basis points x $25.00/basis point = $125.00.

Basis Points and Tick Size in Eurodollar Futures

The minimum allowable price fluctuation, or tick size, is generally established at ½ basis point., or .005%. Based on a million-dollar face value 90-day instrument, this equates to $12.50. However, in the nearby expiring contract month, the minimum price fluctuation is set at 1/4 basis point, or .0025%, equating to $6.25 per contract.

Importance of Pricing in Marketing Strategy

1. Price is the Pivot of an Economy:

In the economic system, price is the mechanism for allocating resources and reflecting the degrees of both risk and competition. In an economy particularly free market economy and to a less extent in controlled economy, the resources can be allocated and reallocated by the process of price reduction and price increase.

Price policy is a weapon to realize the goals of planned economy where resources can be allocated as per planned priorities.

Price is the prime mover of the wheels of the economy namely, production, consumption, distribution and exchange. As price is a sacrifice of purchasing power, it affects the living standards of the society; it regulates business profits and, hence, allocates the resources for the optimum output and distribution. Thus, it acts as powerful agent of sustained economic development.

2. Price regulates demand:

The power of price to produce results in the market place is not equalled by any other component in the product-mix.

It is the greatest and the strongest ‘P’ of the four ‘Ps’ of the mix. Marketing manager can regulate the product demand through this powerful instrument. Price increases or decreases the demand for the products. To increase the demand, reduce the price and increase the price to reduce the demand.

Price has a special role to play in developing countries where the marginal value of money is high than those of advanced nations. De-marketing strategy can be easily implemented to meet the rising demand for goods and services.

As an instrument, it is a big gun and it should be triggered exclusively by those who are familiar with its possibilities and the dangers involved.

It is so because; the damage done by improper pricing may completely sap the effectiveness of the well-conceived marketing programme. It may defame even a good product and fame well a bad product too.

3. Price is competitive weapon:

Price as a competitive weapon is of paramount importance. Any company whether it is selling high or medium or low priced merchandise will have to decide as to whether its prices will be above or equal to or below its competitors. This is a basic policy issue that affects the entire marketing planning process. Secondly, price does not stand alone as a device for achieving a competitive advantage.

In fact, indirect and non-price competitive techniques often are more desirable because, they are more difficult for the competitors to copy. Better results are the outcome of a fine blend of price and non-price strategies. Thirdly, there is close relationship between the product life-cycle and such pricing for competition.

There are notable differences in the kinds of pricing strategies that should be used in different stages. Since the product life span is directly related to the product’s competitiveness, pricing at any point in the life-cycle should reflect prevailing competitive conditions.

4. Price is the determinant of profitability:

Price of a product or products determines the profitability of a firm, in the final analysis by influencing the sales revenue. In the firm, price is the basis for generating profits. Price reflects corporate objectives and policies and it is an important ingredient of marketing mix. Price is often used to off-set the weaknesses in other elements of the marketing-mix.

Price changes can be made more quickly than any other changes in the product, channel, and personal selling and sales-promotion includes advertising. It is because; price change is easily understood and communicating to the buyer in a precise way. That is why, price changes are used frequently for defensive and offensive strategies. The impact of price rise or fall is reflected instantly in the rise or fall of the product profitability, thinking that other variables are unaffected.

5. Price is a decision input:

In the areas of marketing management, countless and crucial decisions are to be made. Comparatively marketing decisions are more crucial because, they have bearing on the other branches of business and more difficult as the decision-maker is to shoot the flying game in the changing marketing environment.

Normally, profit or contribution is taken as a base for pay-off conditions. Price can be a better criterion for arriving at cut-off point because; price is the determinant of profit or contribution.

As pointed earlier, price as an indicator has a special role in the decision-making process in developing countries because, consumer response to price changes will be more quick and tangible as people have higher marginal value of money at their disposal. For instance, if it is a decision regarding selecting product improvement possibilities, select that possibility which gives the highest price as compared to the cost.

These five points make product pricing an important and major function of marketing manager. However, until recently, it has been one of the most neglected areas of marketing management.

In fact, we must have a specialist in pricing as we do have in other functions of marketing. This negligence is quite evident from the fact that even the well-known companies in the world price their products on simple concepts of costs market position competition and desired profit. Scientific pricing is much more than this easy exercise.

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Learning Materials For Marketing, Insurance And Business

Importance Of Pricing

Pricing is equally important in each business firm. Among the four Ps of marketing mix , price is the only element from which a business firm gets money.

The importance of international trade

International trade between different countries is an important factor in raising living standards, providing employment and enabling consumers to enjoy a greater variety of goods.

International trade has occurred since the earliest civilisations began trading, but in recent years international trade has become increasingly important with a larger share of GDP devoted to exports and imports.

World Bank stats show how world exports as a % of GDP have increased from 12% in 1960 to around 30% in 2020.

With an increased importance of trade, there have also been growing concerns about the potential negative effects of trade – in particular, the unbalanced benefits with some losing out, despite overall net gains.

World exports of goods and services have increased to $2.34 trillion ($23,400 billion) in 2020.

Importance of trade

1. Make use of abundant raw materials

Some countries are naturally abundant in raw materials – oil (Qatar), metals, fish (Iceland), Congo (diamonds) Butter (New Zealand). Without trade, these countries would not benefit from the natural endowments of raw materials.

A theoretical model for this was developed by Eli Heckscher and Bertil Ohlin. Known as the Heckscher–Ohlin model (H–O model) it states countries will specialise in producing and exports goods which use abundant local factor endowments. Countries will import those goods, where resources are scarce.

2. Comparative advantage

The theory of comparative advantage states that countries should specialise in those goods where they have a relatively lower opportunity cost. Even if one country can produce two goods at a lower absolute cost – doesn’t mean they should produce everything. India, with lower labour costs, may have a comparative advantage in labour-intensive production (e.g. call centres, clothing manufacture). Therefore, it would be efficient for India to export these services and goods. While an economy like the UK may have a comparative advantage in education and video game production. Trade allows countries to specialise. More details on how comparative advantage can increase economic welfare. The theory of comparative advantage has limitations, but it explains at least some aspects of international trade.

3. Greater choice for consumers

New trade theory places less emphasis on comparative advantage and relative input costs. New trade theory states that in the real world, a driving factor behind the trade is giving consumers greater choice of differentiated products. We import BMW cars from Germany, not because they are the cheapest but because of the quality and brand image. Regarding music and film, trade enables the widest choice of music and film to appeal to different tastes. When the Beatles went on tour to the US in the 1960s, it was exporting British music – relative labour costs were unimportant.

Perhaps the best example is with goods like clothing. Some clothing (e.g. value clothes from Primark – price is very important and they are likely to be imported from low-labour cost countries like Bangladesh. However, we also import fashion labels Gucci (Italy) Chanel (France). Here consumers are benefitting from choice, rather than the lowest price. Economists argue that international trade often fits the model of monopolistic competition. In this model, the important aspect is brand differentiation. For many goods, we want to buy goods with strong brands and reputations. e.g. popularity of Coca-Cola, Nike, Addidas, McDonalds e.t.c.

4. Specialisation and economies of scale – greater efficiency

Another aspect of new trade theory is that it doesn’t really matter what countries specialise in, the important thing is to pursue specialisation and this enables companies to benefit from economies of scale which outweigh most other factors. Sometimes, countries may specialise in particular industries for no over-riding reason – it may just be a historical accident. But, that specialisation enables improved efficiency. For high value-added products, multinationals often split the production process into a global production system. For example, Apple designs their computers in the US but contract the production to Asian factories. Trade enables a product to have multiple country sources. With car production, the productive process is often even more global with engines, tyres, design and marketing all potentially coming from different countries.

5. Service sector trade

Trade tends to conjure images of physical goods import bananas, export cars. But, increasingly the service sector economy means more trade is of invisibles – services, such as insurance, IT services and banking. Even in making this website, I sometimes outsource IT services to developers in other countries. It may be for jobs as small as $50. Furthermore, I may export a revision guide for £7.49 to countries all around the world. A global economy with modern communications enables many micro trades, which wouldn’t have been as possible in a pre-internet age.

6. Global growth and economic development

International trade has been an important factor in promopting economic growth. This growth has led to a reduction in absolute poverty levels – especially in south east Asia which has seen high rates of growth since the 1980s.

Source: St Louis Fed – GDP For World

Problems arising from free trade

Given the importance of free trade to an economy, it is unsurprising that people are concerned about the potential negative impacts.

  • Infant industry argument. The fear is that ‘free trade’ can cause countries to specialise in primary products – goods which have volatile prices and low-income elasticity of demand. To develop, economies may need to restrict imports and diversify the economy. This isn’t an argument against trade per se, but an awareness trade may need to be ‘managed’ rather than just rely on free markets. See more at Infant Industry Argument.
  • Trade can lead to cultural homogenisation. Some fear trade gives an advantage to multinational brands and this can negatively impact local produce and traditions. Supporters argue that if local products are good, they should be able to create a niche than global brands cannot.
  • Displacement effects. Free trade can cause uncompetitive domestic industries to close down, leading to structural unemployment. The problem with free trade is that there are many winners, but the losers do not gain any compensation. However, free-market economists may counter that some degree of creative destruction is inevitable in an economy and we can’t turn back to a static closed economy. On the upside, if the uncompetitive firms close down, ultimately new jobs will be created in different industries.
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