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PV & VFC

Submitted by admin on Tue, 03/22/2011 - 08:45
VFC (Value of Future Cash flows) is an estimate of the value of a deal at this moment in time, based on its known or expected future returns and obligations, and given the prevailing market circumstances.
PV (Present Value) means the same thing as VFC (except for positions in exchange-traded futures, where the concept of “value” is in any case somewhat tricky).
VFC is the term preferred by Reports Manager and Auto Trader, whereas PV is the “native” result type (as used, for example, in Trading Manager results screens).
If VFC is positive then it is an answer to the question “If I were to transfer all the future prospects of this deal to another party, then how much would I expect to get for it?”. If VFC is negative then the question is rephrased as “How much would I have to pay someone to take this liability off my hands?” (The word “liability” should be treated with caution, though, as it may well be a well-justified liability, which is hedged or otherwise offset by other deals.)
Deals which can be treated as a package of cash flows are valued using a combination of discounting and projection: the VFC of the deal is just the sum of its discounted cash flows.
For example, suppose for the sake of simplicity that there is only one exchange of payments remaining before a swap deal matures, and that this exchange is due in six months’ time. Suppose also that the fixed rate payment will be £135,000, the floating rate receipt is known to be £137,500, and the six month sterling discount factor is 0.97.
The total present value of the cash flows is therefore
  £137,500 ´ 0.97 – £135,000 ´ 0.97 = £2,425
This is the VFC (or PV) of the swap deal at the present time.
Products amenable to this type of analysis include swaps, forward rate agreements, cash loans and deposits, miscellaneous cash instruments, FX transactions, and bonds (which guarantee the holder a known stream of interest payments).
Options do not have a projectible future cash flow stream, so an option’s PV must be calculated using more complex models based on probabilities.
Positions in margined exchange-traded futures are also treated differently because profit/loss on these contracts is realised each day. In effect, each morning begins with a “clean slate”, and there are no defined cash flows beyond the loss or gain enjoyed over the last business day.
For these instruments the end-of-day VFC is just the previous day’s profit/loss, whereas PV is apparently the same as NPV (see below), and includes all cash realised over the life of the position.
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