VWAP calculation template

What is the use of VWAP calculation ?

VWAP has multiple uses. It’s most commonly found in it’s natural habitat of trading. But there are a number of other uses too.

• Traders, including retail ones can use this as a trading signal of when to purchase
• Institutional investors sometimes use the volume weighted average price to determine if a particular trade was at a favorable or unfavorable price
• ECM teams will use this as they communicate with clients during general coverage, but also during issuances
• In M&A, the VWAP is often used to determine the premiums paid during an acquisition.

 

There are also some financial regulations such as around ‘stakebuilding‘ which require the use of this number in determining the prices they are obliged to pay (Generally, the offeror is obliged to offer a price that equals at least to the price paid for securities of the target company between the announcement of the offer and the date that is six months from the expiration of the additional acceptance period (best price rule). In mandatory offers, the offer price must be at least equal to the 60 days VWAP (if the stock is liquid) or the highest price paid for securities of the target company by the offeror in the last 12 months preceding the offer, whichever is higher (minimum price rule). Consequently, in case the bidder pays a higher price before or outside the offer, it is required to equally offer such a higher price in its public tender offer.)

For my personal use, I’ve only once had to calculate VWAP which was when evaluating potential targets and getting a feeling what the general trading price and therefore market cap is to calculate a baseline enterprise value, before digging deeper.

A look at the template

I made this model at the same time I built the Simple LBO model template looking at the proposed acquisition of Perpetual Asset Management by KKR. You can see a fairly obvious trading band.