The Value Research Of The Valuation Adjustment Mechanism

The valuation adjustment mechanism is an agreement between the investor and the financer. The investor can exercise a right if the promised condition occurs, and so does the financer. Actually, the VAM can be seen as an option, which can protect the investor's interests by the design of the terms.The VAM can be seen as a real option, because its underlying asset is not financial assets such as currency, stocks, bonds or physical assets such as precious metals, petroleum and agricultural products. Therefore, it can be priced by real option theory which has two common methods of Black-Scholes option pricing model and binary tree model. In this paper, the author chooses the former one to study the case.Recent years, many international investment banks swarm into China to find opportunities. At the same time, many private enterprises are in urgent need of funds to further development. Under this condition, some private enterprises channel capital to businesses by signing a VAM agreement with these investment banks. However, because of lacking risk awareness and professional knowledge of financial instruments, these enterprises usually have to face huge risk and limited profit.In order to teach other enterprises facing similar conditions a lesson, in the third part of this paper, the author chooses a classic case to analyze. By showing the investor and the financier's respective expected returns and risks, the author wish our country's enterprises raise risk awareness, choose financing vehicles matched to themselves.In the last part of this paper, the author gives them some specific suggestions. For the enterprises wish to channel foreign funds, they should precisely analyze the advantages and disadvantages of the VAM, the development of their sector, their actual need besides funds, and finally, the last but the least is they should enhance their management.