8.2.3 Value Date

8.2.3  Value Dates

When we value an instrument—a stock, deposit, swap, block of electricity, etc.—the result reflects our perception of the price the instrument might command in the market. The value date is the date on which the quoted price would be paid. If the instrument were delivered today for payment today, it would command a certain price. If it were delivered today for payment in a month, it would command a different price due to the time value of money.

Suppose an electricity generator sells electricity for payment in 30 days. It hedges its fuel costs with NYMEX natural gas futures, which settle (margin) daily. If the generator marks its positions to market, it cannot simply sum its receivables and the value in its margin account. The receivables have a value date 30 days in the future. Money in the margin account has a value date of today.

A value date does not have to be the actual date on which money will change hands. We can discount value or accumulate it to reflect some other payment date. Our electricity generator might discount its receivables back to today before netting them against the balance in its margin account. To mark a portfolio to market, it is reasonable to select a single value date and accumulate or discount all values to that date.

The simplest approach to valuation is cash valuation. With cash valuation, a valuation at time t reflects a value date of t—so asset value 0si reflects value date 0, and asset value 1Si reflects value date 1. If, in a particular market, spot contracts settle in n trading days, cash valuation requires that spot prices at time 0 be discounted back τ(n) basis days.

Alternatively, we might use nth-day valuation, where the value date occurs n trading days after the time a price is quoted. With this approach 0si reflects a value date of n trading days, and 1Si reflects a value date of n +1 trading days. With nth-day valuation, prices of spot contracts that settle in n trading days require no discounting.

Given the simplicity of cash valuation, why would we ever use nth-day valuation? Doing so can be convenient. Suppose you hold 100 shares of a particular stock that is trading at USD 56. Based upon that price, you value the position at USD 5600. Because a sale of the stock today will not settle for 3 trading days, you have just employed 3rd-day valuation.