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CFA II > Alternative Investments > Flashcards

Alternative Investments Flashcards

1
Q

When can the cost approach to valuing property not be used?

A

When depreciation and/ or obsolescence are difficult to measure, e.g. when a building is old.

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2
Q

What is the formula for calculating the value of a building using the direct capitalisation method?

A

V = NOI / (r - g)

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3
Q

What is the calculation for physical deterioration?

A

Physical Deterioration = Replacement Cost x (Effective Age/ Economic Life)

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4
Q

What is calendar spread?

A

The difference between the price of longer dated futures and shorter dated futures on the same commodity.

Calendar Spread = Future Price Distant - Future Price Near

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5
Q

What is the insurance theory?

A

The insurance theory says that futures buyers should be compensated for taking the risk from sellers, so they should be able to buy the futures at lower prices.

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6
Q

What is the hedging pressure theory?

A

The hedging pressure theory builds on the insurance theory by saying that the Spot-Future relationship can be determined by long hedgers (i.e. Buyers locking in future prices) as well as short hedgers (i.e. Sellers locking in future prices).

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7
Q

What are the components of total return on a commodity derivative?

A

Total Return = Price Return + Roll Return + Collateral Return

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8
Q

What is roll return?

A

Roll return occurs when future prices are lower than spot prices, so when one futures contract expires (at the high spot price) and t the next is entered into at a lower price, a return is achieved.

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9
Q

What is a total return swap?

A

The variable payments are made based on the price change of a commodity.

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10
Q

What is an excess return swap?

A

The variable payments are made based on the difference between a commodity price and a benchmark value.

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11
Q

What is a basis swap?

A

The variable payments are made based on the price difference between two commodities.

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12
Q

What is the main difference between a REOC and a REIT?

A

A REOC reinvests the majority of its earnings whereas are REIT distributes the majority of its earnings.

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13
Q

Who incurs the operating expenses under a net lease - the landlord or the tenant?

A

The tenant.

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14
Q

What is the calculation for property value under the cost approach?

A

V = Replacement Cost + Value of Land - Physical Deterioration and Obsolescence

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15
Q

What are the three types of obsolescence?

A
  1. Functional (Design Defects)
  2. Locational
  3. Economic
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16
Q

What is the formula to calculate functional obsolescence?

A

Functional Obsolescence = Reduction in NOI/ Cap Rate

17
Q

Which of the following is tax-advantaged:

  1. REITS
  2. REOCS
  3. Direct Property Investment
A

REITS and Direct Property Investment.

REOCS are NOT tax-advantaged.

18
Q

Which has more seasonality - gas or oil?

A

Gas - It is used in winter for heating and in summer for electricity for cooling.

19
Q

What is the formula for future price under the theory of storage?

A

F = S - Convenience Yield + Storage Costs

20
Q

What is the formula for no. of contracts to hedge a portfolio benchmarked to an index?

A

No. of Contracts = Portfolio Value / Multiplier * Index Level

21
Q

What is the formula for property value under the cost approach?

A 
Value = Land Value
\+ Replacement Cost (Inc. Builder Profit)
\+ Curable Depreciation
\+ Incurable Depreciation = Remaining Life/ Econ Life * Sum of Above
\+ Obsolescence
22
Q

In a forward arbitrage situation, do you borrow or lend the currency selling at a discount?

A

Borrow.

23
Q

What does the N(d) part of the BSM represent?

A

The risk-neutral probability that the call/ put option will expire in the money.

24
Q

Which type of property have the fewest unique characteristics?

A

Residential properties.

25
Q

Which valuation method is not suitable for old buildings?

A

The cost model.

26
Q

How do you calculate max loan amount based on debt service coverage?

A
  1. Calculate Max Debt Service based on target ratio = NOI / Target DSCR
  2. Calculate the Max Loan = Max Debt Service / Int. Rate
27
Q

How do you know if leverage will increase RoE?

A

If required return > interest rate.

CFA II (11 decks)

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