What is "price discovery"?

We often use the phrase "price discovery" on the assumption that everyone knows what it means. So, this is an attempt to shed more light on what the general usage refers to.

The following image illustrates an example of "Price Discovery" on cash rates. What rates banks can offer to a client for their cash balances.

In the financial markets, it is often referred to as the process by which the market determines the fair value of an asset through the interactions of buyers and sellers.

Various factors impact pricing supply and demand, investor risk attitudes, and the broader economic and geopolitical context. The efficiency of price discovery is influenced by market liquidity, transparency, and technological advancements, which can enhance or impede the accurate reflection of an asset's value in its price.

Price discovery can be a critical function in evaluating business or project feasibility. And with higher interest rates, the impact is becoming clearer each day. Organizations calculate the feasibility of projects dependent on varying interest rates usually on the borrowing side. It is equally important on the investment side.

So as an example, if an organization can safely earn say 5% on cash at bank, why would they invest in a project that offers less than that. That is amongst the reasons why price discovery is important.

But here is the catch. Banks deliberately make the process too hard and opaque, and organizations then do nothing. Losing money to the banks.

This is most problematic for organizations who fall into the "pre-treasury" category. [Thanks to Tracey Knight who I believe coined that beautiful phrase]

Thats why price discovery is important.