Evaluation of specific preferred share issues by HIMIPref™ is at the heart of the system; issues are evaluated by:
- Calculate an attribute applicable to a preferred share ("A").
- Normalize it so that the value of the attribute multiplied by its normalization factor, "N", will have a definite meaning comparable to other such products
- Parameterize this product (parameter "P") so that the resultant product is a measure of value on a scale common to all such parameterized products
- Sum the products obtained above to obtain a meaure of valuation, "V", for the instrument by which it may be compared to other instruments.
In mathematical terms, the above process may be written as:
V = Σ (A * N * P)
In order to assist understanding of the valuation process, the calculated values ("rewardComponentTypes") are sorted into several rewardComponentClasses:
In addition to these rewardComponentTypes, HIMIPref™ also defines penalties: these are values very similar in intent to the rewardComponentTypes, but are not incorparated into this group as there is no logical direct relationship between these variables and expected return - the intent of these parameters is to reduce the otherwise calculated value of each instrument due to the degree of uncertainty regarding the expected returns that they measure. Hence, if one were to seek issues to short, one would emphasize instruments with low values of rewardComponentsBid / rewardComponentsAsk and add, rather than subtract, the values of these penalties: