12 August 2010
most of the us companies present in financial statements level 3 financial instrument. Did you explain level 3 financial instruments what is difference between level 1,2,3 securities
31 August 2010
The levels here refers to the certainity at which we can ascertain the value of the instrument (and also about their liquidity).
Level 1 - values are known and instrument has a liquid market. For e.g. Shares of Tata Motors. Liquidity is good and you can know the price with certainty by looking at BSE/NSE prices. Key - Prices are quoted. Market is Active (liquidity) Level 2 - values are known from quoted market but liquity is an issue due to market not very active. For e.g. Some Tresury securities. You may find the willing buyers will be few which affects liquidity. So you may have to wait to sell them for a day or two. Key - Prices are quoted. Market is not fully active (liquidity is not very good) Level 3 - values are largely not known through trading, but through valuation models based on assumptions. Liquidity is very bad. For e.g. Shares in OTC market or shares in a private company. Key - Prices are someties quoted or never quoted. So you have to make assumptions to know the value. Market sometimes exist to trade and sometimes does not.
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