European embedded value

<h2 id="types">Types</h2>
<p>EEV can be "real world" or "market consistent". The former takes the best estimate for parameters that are available, whereas the latter uses a slightly constrained set of parameters which are close to best estimate, but which produce results which match market-related hedge costs.
</p><p>Real-world EEV usually uses a risk discount rate made up of the <a href="/facts/Risk-free_rate/BJprxn2e">risk-free rate</a> plus a risk margin which reflects the weighted average cost of capital and Beta from the <a href="/facts/Capital_asset_pricing_model/jqUMvmlL">CAPM</a> model. Using company-level economic models clearly reflects a top-down approach to determining the risk discount rate.
</p><p>Market-consistent EEV makes use of a bottom-up approach for determining the risk discount rate, which produces a number which equals the risk free rate plus an explicit allowance for <a href="/facts/Operational_risk/71tURHLw">operational risk</a> and <a href="/facts/Market_risk/anS5bmz9">market risk</a>.
</p><p>Although initially there was an equal use of these two types of EEV, as time passes companies appear to be moving towards the market-consistent approach.
</p>

<h3>General</h3>
<ul><li><a href="http://www.cfoforum.nl/letters/eev_principles.pdf">European Embedded Value Principles</a></li>
<li><a href="http://www.towersperrin.com/tp/getwebcachedoc?webc=TILL/USA/2006/200607/update_eev.pdf">Tillinghast publication on trends in EEV usage</a></li></ul>

European embedded value open-in-new

European embedded value