What Is the Present Value of a Perpetuity Formula and What Are Perpetuities?

First of all, what is the ordinary meaning of “perpetuity?” It simply means “forever.” So in finance, what do we mean by this same concept? Well, imagine I gave you a piece of paper or certificate, and that paper promised that I would pay you a fixed amount every year, forever. That piece of paper is called a “perpetuity.” Simple! How is it different from, say, a promissory note? It isn’t. We can say it’s a special type of promissory note which lasts forever, with regular payments every year (or every month or other time period).

Now the question is… if I tried to sell you this piece of paper, how much would you be willing to pay for it? If I said… buy this piece of paper for only $100, and I’ll give you $2 for the rest of your life, forever. Would you buy it? It sounds like a great deal, doesn’t it? After all, you just pay once, and then you’ll get money from me forever!

But think about it another way too… Let’s say the bank’s interest is 5% per year. If you put the same $100 in the bank and left it there forever, how much would you get every year, forever? You’ll get $5 per year! ($5 is 5% of $100). Much more than the $2 per year you would get from me if you buy my piece of paper above for $100! So, are you still willing to pay me $100 to get $2 per year forever? Or, would you rather use the same $100 to deposit in the bank, and get a much higher $5 per year instead?

Of course, you’ll prefer to put your money in the bank! However, you might still be willing to buy my piece of paper or perpetuity if I lower the price. How much should I lower it to make it worth your money? $80? $60? $40? Naturally, we can’t simply use our feelings to guess the right price. So how do we find the exact amount? For this, we use the Present Value of a Perpetuity Formula. With this, you will find that the “fair value” in this case is $40. The simplest formula, which assumes consistent annual cash flows, looks like this.
*Fair value = $40 means that if you pay any more than that, you’re getting a sour deal… you’ll be in a better situation putting your money in the bank.

What is the logic behind this “fair value”? We go back to the IRR concept. At the fair value of $40, the IRR of our perpetuity is exactly the same as the interest rate of your bank deposit. Meaning: $40 earning $2/year will have an IRR of 5%. A bank deposit of $100 earning $5 per year will also have an IRR of 5%; thus making the returns the same or “fair.”

Forex Money Managers – Handling Whipsaws, The Clear And Present Danger

No matter how careful or experienced a forex trader one may be, the whipsaw is always a clear and present danger. This is one event that can and will catch one off guard, literally knocking even the most able forex manager off his feet. While, every trader will be whipsawed a number of times during his trading career, there are ways to reduce the number of possible whipsaws one may suffer.

I’ve been ‘whipsawed,’ and quite a number of times to. However, as the years ticked by, I started to realize that there are certain scenarios when a whipsaw may strike and disciplined myself to steer clear away form them.

A whipsaw’ is a term used to describe a situation when the market moves defiantly against all logic. A trader may have placed an order expecting the market to go in a certain directions according to his calculations, when suddenly the market moves against him, taking him and his investment for a toss stopping out his trade and all within the hour too.

While most traders will retire disgruntled, cursing their luck and even perhaps blaming the broker for ‘keeping an eye’ on the trade and ‘fixing’ it to make him lose money, other seasoned trader, there for the long haul and to make a career of the profession, will learn from their mistakes, analyse and return only to be stronger, better prepared and will make more money in time.

Whipsaws occur unexpectedly and can cause great loss, however if one knows certain market conditions these events occur in, one can be prepared. Even though managing whipsaws cannot have a one-size-fits-all solution, one can minimize losses and not be wiped out in one blow.

Whipsaws usually and almost definitely occur, when the market ranges. This happens around holiday time such as Christmas, Thanksgiving, New Year etc, when volumes are low. Summers are the time when most whipsaws occur. This is because a lot of people are on vacation and volumes are very low. August is a particular month to watch out for. If you have to trade in summer don’t go with the daily trends, because the markets may look bullish one day and bearish the next. Go with a longer time frame. A week or month is better.

Always keep with the trend. This will reduce the chances of getting whipsawed. Keep a large margin of at least 200 pips. Whipsaws always return to the entry level after a few days if not a few hours.

Last but not the least, if you have been whipsawed you will be angry and frustrated, but don’t try to fight the market, you can’t get even, revenge is a killer especially where trading is concerned. If you have been stopped out, you will just have to wait it out. There will be other days to make some money. Remember, trade with a strategy that you stick to like glue. This includes having some indicators in place, entering the market when they indicate to do so, keeping a fixed lot size to trade, earning a fixed number of pips before you close the trade, keeping a fixed maximum number of pips before stepping out, and you will find that with a good strategy and some practice, you will begin to make more profitable trades than losing ones. The averages will have you smiling your way to the bank!

Christmas Present Ideas for Girlfriends to Arouse Her Senses!

What to get your girlfriend for Christmas… that’s a million dollar question, isn’t it? You’ve been saying for months you want to treat her to the best Christmas pressie ever. But now it’s mid-December, and you’re still scratching your head.

One piece of advice, the below items do not make good Christmas presents for girlfriends:

  • A CD by your favourite artist so you can listen to it at her house
  • A gift voucher for a steak restaurant when you know she’s a vegetarian
  • A “how to lose weight” book
  • Acne pills (even if she really needs it)

So what’s the secret to selecting one-of-a-kind Christmas gifts for girlfriends? Quite simply, choose something that satisfies her five senses – taste, touch, smell, sight and sound.

Give a gift with a special “touch”

Keep her all snugly and warm this winter with fluffy slippers, cute gloves or a cosy scarf. Loads of retailers offer these snugly pressies in Christmassy-themed styles, emblazoned with reindeers, snowmen, penguins, santas and more. These make uber-cosy Christmas presents for girlfriends everywhere.

Tantalise her taste buds

Indulge your lovely lady with something scrumptious to munch on like chocolates, sweets or brownies. Or go the extra mile… Nowadays, you can get your hands on chocolate bars, delicious truffles, cakes, retro sweetie jars – the list goes on – featuring her name and your own special message on the packaging. You could even – yep, get you apron on – whip her up a batch of homemade cookies. Mmmmm.

See the sights…

Of course, you can snap up a pair of theatre tickets to see a cool show like Chicago, Blood Brothers or Phantom of the Opera. Or if she’s off on her travels, buy her a Lonely Planet book on the place she’s going to. But there is a very simple alternative. Two words: gift experience. Treat her eyes to unbelievable sights… Send her on a Champagne hot air balloon flight; let her enjoy an unrivalled view of London with a helicopter tour, or take a day’s tour at Windsor Castle.

Treat her to spot of “sound” therapy

Let’s face it, what woman doesn’t love a bit of music? Whether she’s into Rihanna, Alicia Keys, Justin Timberlake or Madonna, there are loads of CDs up for grabs. Better yet, indulge her with two top price tickets to a theatre production, followed by a delicious meal for two at a top-notch restaurant. On a budget? Christmas present ideas for girlfriends don’t have to cost the earth. Create a compilation CD that’s full of all her “besties” and even some that remind her for you, or you of her…