When purchasing a financial asset, the buyer looks into various facets of the product. One of the primary areas that affect the purchasing decision of the buyer is the price. Therefore, understanding what affects the speculative element of the price and how it can be derived is important, as the decision to purchase the asset will depend on it to a great extent. With most financial assets there is a speculative element associated with the risk associated with the asset.
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For instance, the price component that of the financial asset that is part of hedging is considered as a risk aversion or minimization strategy. In order to understand the real value of an asset, the investor looks into the fair value of the asset calculated in accordance with the US GAAP. According to this, the price at which two willing parties are ready to purchase an asset at a definite price is called the fair price. Therefore, the price at which the asset has maximum liquidity is considered to be the fair price. This price is an important consideration for the investor who intends to purchase a particular asset.
It is important for investors to keep in mind that the prices of assets are determined through a demand supply mechanism, as this will determine the value of the asset in future. As this is a competitive process, individual buyers or sellers will have little or no control over the prices. Hence, the investors have to undertake certain amount of risk while making the investment. This is the consideration that all investors must consider as assets hold a certain degree of speculation. Thus, investors usually are sensitive to shifts in prices, making the asset market volatile and prone to investor sentiments.
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