Pricing strategiesA business can use a variety of pricing strategies when selling a product or service. To determine the most effective pricing strategy for a company, senior executives need to first identify the company's pricing position, pricing segment, pricing capability and their competitive pricing reaction strategy. Pricing strategies and tactics vary from company to company, and also differ across countries, cultures, industries and over time, with the maturing of industries and markets and changes in wider economic conditions.
PricingPricing is the process whereby a business sets the price at which it will sell its products and services, and may be part of the business's marketing plan. In setting prices, the business will take into account the price at which it could acquire the goods, the manufacturing cost, the marketplace, competition, market condition, brand, and quality of product. Pricing is a fundamental aspect of product management and is one of the four Ps of the marketing mix, the other three aspects being product, promotion, and place.
Dynamic pricingDynamic pricing, also referred to as surge pricing, demand pricing, or time-based pricing, is a revenue management pricing strategy in which businesses set flexible prices for products or services based on current market demands. Businesses are able to change prices based on algorithms that take into account competitor pricing, supply and demand, and other external factors in the market. Dynamic pricing is a common practice in several industries such as hospitality, tourism, entertainment, retail, electricity, and public transport.
Valuation of optionsIn finance, a price (premium) is paid or received for purchasing or selling options. This article discusses the calculation of this premium in general. For further detail, see: for discussion of the mathematics; Financial engineering for the implementation; as well as generally. This price can be split into two components: intrinsic value, and time value (also called "extrinsic value"). The intrinsic value is the difference between the underlying spot price and the strike price, to the extent that this is in favor of the option holder.
Real options valuationReal options valuation, also often termed real options analysis, (ROV or ROA) applies option valuation techniques to capital budgeting decisions. A real option itself, is the right—but not the obligation—to undertake certain business initiatives, such as deferring, abandoning, expanding, staging, or contracting a capital investment project. For example, real options valuation could examine the opportunity to invest in the expansion of a firm's factory and the alternative option to sell the factory.
Trading strategyIn finance, a trading strategy is a fixed plan that is designed to achieve a profitable return by going long or short in markets. The main reasons that a properly researched trading strategy helps are its verifiability, quantifiability, consistency, and objectivity. For every trading strategy one needs to define assets to trade, entry/exit points and money management rules. Bad money management can make a potentially profitable strategy unprofitable. Trading strategies are based on fundamental or technical analysis, or both.
Lattice model (finance)In finance, a lattice model is a technique applied to the valuation of derivatives, where a discrete time model is required. For equity options, a typical example would be pricing an American option, where a decision as to option exercise is required at "all" times (any time) before and including maturity. A continuous model, on the other hand, such as Black–Scholes, would only allow for the valuation of European options, where exercise is on the option's maturity date.
Price discriminationPrice discrimination is a microeconomic pricing strategy where identical or largely similar goods or services are sold at different prices by the same provider in different market segments. Price discrimination is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy. Price differentiation essentially relies on the variation in the customers' willingness to pay and in the elasticity of their demand.
Rational pricingRational pricing is the assumption in financial economics that asset prices – and hence asset pricing models – will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments. Arbitrage is the practice of taking advantage of a state of imbalance between two (or possibly more) markets. Where this mismatch can be exploited (i.
Asset pricingIn financial economics, asset pricing refers to a formal treatment and development of two main pricing principles, outlined below, together with the resultant models. There have been many models developed for different situations, but correspondingly, these stem from either general equilibrium asset pricing or rational asset pricing, the latter corresponding to risk neutral pricing.
Algorithmic tradingAlgorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of computers relative to human traders. In the twenty-first century, algorithmic trading has been gaining traction with both retail and institutional traders. A study in 2019 showed that around 92% of trading in the Forex market was performed by trading algorithms rather than humans.
Predatory pricingPredatory pricing is a commercial pricing strategy which involves the use of large scale undercutting to eliminate competition. This is where an industry dominant firm with sizable market power will deliberately reduce the prices of a product or service to loss-making levels to attract all consumers and create a monopoly. For a period of time, the prices are set unrealistically low to ensure competitors are unable to effectively compete with the dominant firm without making substantial loss.
Binomial theoremIn elementary algebra, the binomial theorem (or binomial expansion) describes the algebraic expansion of powers of a binomial. According to the theorem, it is possible to expand the polynomial (x + y)n into a sum involving terms of the form axbyc, where the exponents b and c are nonnegative integers with b + c = n, and the coefficient a of each term is a specific positive integer depending on n and b. For example, for n = 4, The coefficient a in the term of axbyc is known as the binomial coefficient or (the two have the same value).
Automated trading systemAn automated trading system (ATS), a subset of algorithmic trading, uses a computer program to create buy and sell orders and automatically submits the orders to a market center or exchange. The computer program will automatically generate orders based on predefined set of rules using a trading strategy which is based on technical analysis, advanced statistical and mathematical computations or input from other electronic sources. These automated trading systems are mostly employed by investment banks or hedge funds, but are also available to private investors using simple online tools.
Binomial coefficientIn mathematics, the binomial coefficients are the positive integers that occur as coefficients in the binomial theorem. Commonly, a binomial coefficient is indexed by a pair of integers n ≥ k ≥ 0 and is written It is the coefficient of the xk term in the polynomial expansion of the binomial power (1 + x)n; this coefficient can be computed by the multiplicative formula which using factorial notation can be compactly expressed as For example, the fourth power of 1 + x is and the binomial coefficient is the coefficient of the x2 term.
Derivative (finance)In finance, a derivative is a contract that derives its value from the performance of an underlying entity. This underlying entity can be an asset, index, or interest rate, and is often simply called the underlying. Derivatives can be used for a number of purposes, including insuring against price movements (hedging), increasing exposure to price movements for speculation, or getting access to otherwise hard-to-trade assets or markets.
Put optionIn finance, a put or put option is a derivative instrument in financial markets that gives the holder (i.e. the purchaser of the put option) the right to sell an asset (the underlying), at a specified price (the strike), by (or on) a specified date (the expiry or maturity) to the writer (i.e. seller) of the put. The purchase of a put option is interpreted as a negative sentiment about the future value of the underlying stock. The term "put" comes from the fact that the owner has the right to "put up for sale" the stock or index.
Day tradingDay trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy-and-hold and value investing strategies.
High-frequency tradingHigh-frequency trading (HFT) is a type of algorithmic trading in finance characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons in trading securities. HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second.
DerivativeIn mathematics, the derivative shows the sensitivity of change of a function's output with respect to the input. Derivatives are a fundamental tool of calculus. For example, the derivative of the position of a moving object with respect to time is the object's velocity: this measures how quickly the position of the object changes when time advances. The derivative of a function of a single variable at a chosen input value, when it exists, is the slope of the tangent line to the graph of the function at that point.
