CFA1 Flashcards
(203 cards)
1
Q
IFRS DB plan service cost treatment
A
PNL
2
Q
IFRS DB plan service cost treatment
A
PNL
3
Q
GAAP DB plan service cost treatment
A
Current: PNL & Past: OCI
4
Q
IFRS DB plan Net I/E treatment
A
PNL
5
Q
GAAP DB plan Net I/E treatment
A
PNL
6
Q
IFRS/GAAP DB plan Net I/E treatment
A
PNL
7
Q
IFRS/GAAP DB plan remeasurement treatment
A
OCI
8
Q
Net I/E formula IFRS (DBPP)
A
Net A/L x DR
9
Q
Net I/E formula GAAP (DBPP)
A
Net A x E(R) - Net L x DR
10
Q
Return Remeasurement IFRS/GAAP
A
Act(R) - E(R)
Where E(R) is based off DR in IFRS but forecasted E(R) for GAAP
11
Q
IFRS/GAAP DR is based off?
A
Yield on IG Corp Bond
12
Q
MLM - HCM: EFP & EMP
A
EFP & EMP = Intermediate (?)
13
Q
MLM - HCM: RFP & EMP
A
RFP & EMP = CCY DEPR.
14
Q
MLF - LCM Based off?
A
Trade flows
15
Q
MFM - HCM based off?
A
Capital flows
16
Q
MFM - LCM EMP & EFP
A
Imports up, CCY down
17
Q
MFM - LCM RMP & RFP
A
Imports down, CCY up
18
Q
MFM - HCM RMP & EFP
A
CCY APPR.
19
Q
Significant sources of daily TE (ETFs)
A
Composition (eg restrictions or universe size)
Note: Fees and expenses play a minimal role, and taxes usually do NOT play a role
20
Q
NH (Neutral Hedge) formula
A
NH = - port.delta / sec.delta
Where port.delta = sec x delta
And is +ve for long -ve for short
21
Q
Delta increases as options go more…
A
ITM (ceteris paribus)
22
Q
ATM call option delta at maturity is equal to
A
0.5
23
Q
E(Δ in DPS) formula
A
E(Δ in DPS) = [E(EPS) x target - D_0] x 1/n
24
Q
CRM is used when
A
Subsidiary functional CCY differs from parents reporting CCY
25
TRM is used when
Subsidiary functional CCY is the same as the parents reporting CCY
26
CRM - CTA adj. on what statement?
B/S (CTA)
27
CTA adj steps
CRM only - start with I/S
1. Calc NI (new RE) with avg rate
2. Calc Assets with CR
3. Calc Liabilities with CR
4. Calc Equity with HR
5. Add new RE (from step 1)
6. Calc amt to balance = CTA
28
I/S translation G/L steps
TRM only - start with B/S
1. Calc TA with TRM conv.
2. Calc L+E with TRM conv.
3. Calc plug to balance
4. Calc I/S using TRM conv.
5. Use plug (step 3) as NI
6. Ant to balance = G/L
29
CRM conventions
I/S use AR (including NI)
B/S use HR for CS
B/S use CR for everything else
30
TRM conventions B/S
Monetary use CR
Inventory use RWP (or HR)
PPE use HR
Total = sum of calcs
Note: the question may or may not say when inv or PPE was purchased - look out for this
31
TRM conventions I/S
Sales = AR
COGS = RWP (or HR)
SG&A = AR
DEP = HR
Int & tax = AR
Plug (G/L) = calc to balance
NI = RE taken from B/S plug
32
What formula is this:
(AP)⋅PVA⋅(Rfix)⋅N(d1) −(AP)⋅Xr⋅PVA⋅N(d2)
Payer Swaption
Why? Because you are long the floating rate. If it goes up, the market rate at expiration (Rfix) will be higher than the strike agreed at inflation. The swaption is ITM when the floating rate (and consequently the market swap rate) increases relative to your strike.
33
What formula is this:
(AP)⋅PVA⋅Xr⋅N(d2)−(AP)⋅PVA⋅Rfix⋅N(d1)
Receiver swaption
Why? Because you are short the floating rate. If it goes down, the market rate at expiration (Rfix) will be lower than the strike agreed at inflation. The swaption is ITM when the floating rate (and consequently the market swap rate) decreases relative to your strike.
34
M&C who engage in independent practice while still employed must:
1. Describe the types of service they will render
2. The expected duration
3. The compensation
They should not render services until they receive consent from their employer
35
To detect SC in an AR model
Look for t-stats of the autocorrelations of the residuals being greater than the critical value
36
What models is the DW test not suitable for?
AR models!
37
Steps to run a DF test for a unit root
1. Subtract the first lag from each side of the AR(1) mode
2. Replace b1 with g1 = (b1-1)
3. H0: g1 = 0 ; Ha: g1 < 0
H0: times series has a unit root and is non-covariance st. (I.e., is a random walk)
Ha: No unit root and covariance st.
38
MRL formula
MRL = b0/(1-b1)
39
IFRS ending DBPP asset formula
BGN x [1+act(R)] + contributions - benefits paid
40
IFRS ending DBPP liability formula
BGN x (1+DR) + benefits earned - benefits paid
41
IFRS total period pension cost formula
TPPC = Curr. Serv. + Int. + Past - Act.Gain + Act.Loss - Act(R)
Where Curr. Serv. Cost could be named pension benefits earned, employee benefits, opex, current cost, etc.
Note: Act. Is both actuarial and actual above. And Curr., Int., and Past, are all costs.
42
The grant date fair value of an RSU is
It’s market value and it does not change over time.
As such, RSUs will be a greater I/S expense than a ESO
43
What is ignored when combining B/Ss in the acquisition method and why?
Ignore equity. Why? Because it’s folded into the concept of net assets which was used to get goodwill
44
Partial GW formula
PGW= FV(paid) - NIA x %.of.acq
45
Full GW formula
FGW = amt.paid/%.of.acq - NIA
46
Where does the difference between FGW & PGW ultimately end up?
It funnels down to NCI
47
NCI - FGW formula
NCI.F = amt.paid/%.acq x (1 - %.acq)
48
NCI - PGW
NCI.P = NIA x (1 - %.acq)
49
In a steady state what is the MPK equal to?
MPK = r
Capital is just being paid it’s required rate of return
50
In a steady state Y/K is a
Constant
51
In a steady state, what affect will capital deepening have on the economy?
None. Both k (d.K/L) and y (d.Y/L) grow at theta/(1-a)
52
Steady state rate of growth of output formula
Theta/(1-a) + d.L/L
53
If UIRP and CIRP hold
Then forward rate parity would prevail - the fwd fx rate would equal the expected future spot fx rate, serving as an unbiased predictor
54
CDS upfront pmts
1. Work out the spread for the bond in question
2. Work out the risk-free yield
3. Work out difference
4. Relative to the standardised premiums (1% & 5%), if under seller pays upfront premium.
And vice versa. Why? Because the buyer would be paying more premium for less risk. Therefore the seller must compensate them at initiation to bring the contract value to zero.
55
The CTD on a CDS is chosen based off?
Any debt obligation issued by the borrower ranked equivalently in priority of claims (p.p) or higher!! Then choose CTD
56
Change in value of CDS (for buyer)
d.spread x Duration x NA
57
N(d1) + N(-d1) =
100%
CDF
58
Surrender value is the amount
The policy holder receives if they surrender the policy - it is equal to the current cash value or NPV based off actuarial estimates
59
Life settlements in hedge funds aim to
Buy life settlement’s from brokers with assumptions that lead them to believe the original policy holder will die earlier than the policy was priced at - therefore making a profit
60
In a replication strategy what how do you make it so the cash outlay is equal to the position you’re attempting to replicate?
You must invest or borrow the remaining balance
61
If bias error is high and variance error is high, what could a modeler use to reduce the variance error?
Use cross validation error.
You would not aim to penalise complexity because complexity is not an issue if the bias error is high (not an overfitting issue)
62
Roll return formula
(Near - far)/near x %.being.rolled
63
Merger arb via options
Long bond, short put
Viewed as selling insurance on a given acquisition. I.e., if it is successful (no crash), the fund collects the premium for taking the risk. If it fails, you lose on the long and short.
64
When are American and European calls options the same price?
When they pay no dividends.
Logically, they will never be called early. This is because the exercise value will be less than the valuation (I.e, you’re better off selling it).
65
What does conditional heteroskedasticity cause in the test stats?
It understates variance, therefore, over stating (inflating) t-stats
66
Equity method of accounting
~20 - 50% or “significant influence, but no control”
67
Conversion Value formula
P0 x CṞ
68
Conversion Ratio form.
CṞ = Par / CP
CP & CR are fixed
69
MC$ formula
MC$ = PV0 / CṞ
70
MCP form.
MCP = MC$ - P0
71
Weighted Harmonic mean vs Xh
WHM = 1 / £(w/x)
Xh = n / £(1/x)
72
EVA formula
EVA = MVIC - [WACC x BVIC]
73
Combined Ratio
Comb.R. = UWE/NPW + L&L.a.E/NPE
74
Value of a Swap formula
V_s = (rfx_t - rfx_o) x £DF x NA
75
Value of an Equity Swap
V_eq.s = NA.(St/So) - NA.(rfx x £DF + DF_L)
76
When no significant influence is deemed, and an investment is accounted for using FV2OCI, where do dividends go?
Dividends go to PNL still because they are income not capital
77
Steps for interpolating matrix pricing
1. Calculate the avg YTM for each maturity (no matter the CR)
2. Use the average YTM as the base to add to, and add the distance between to get your answer
78
ERP gk Formula
ERP_gk = [DY + PEg + i + g + %.d.S] - rf
79
EVA =
NOPAT - (C% x TC)
or
MVIC - (BVIC x WACC)
Where NOPAT = EBIT(1-t)
80
FCFF is used over FCFE when
The firms cap structure is in flux!
FCFE and FCFF can both be used for a levered company
81
How is amortisation prem./discount treated for FCFF
It is part of the interest expense component. As such, the discount (nc expense) is added back. The premium (nc income) is subtracted.
82
What does refinancing shorter maturities into longer maturities do to the yield curve?
It will steepen it. Because the act of refinancing means you need to buy back the debt to pay it off. This drives up the price, and down the yield. Vice versa for the long end
83
Quoted Futures formula
Equilibrium formula
F0 + AI_T = FV(B0 + AI_0 - PVCI)
More intuitive:
= FV(S0) - AI_T - FVIC
Where:
B0/S0= clean/dirty price
Q0 = F0 / CF
Note: QF pricing uses regular compounding (not LIBOR rates)
84
DF test model
Xt- Xt-1 = b0 + g1.Xt-1 + €
Where E(€) = 0
85
What is the Dutch Disease
When a country has high currency appreciation driven by high export demand which makes other sectors of the economy - particularly manufacturing - globally uncompetitive. This can hinder that countries TFP growth.
86
Endogenous growth model asserts
No diminishing marginal returns to capital for the economy as a whole. I.e., savings and investment decisions can generate self-sustaining growth and permanently higher rates
87
What is restated for inflation vs what is not under IFRS
Restated: Land
Not restated: Cash and monetary items
88
AFFO formula
AFFO = NI + D&A (+/- L/G on dep. assets) - NCR - m.CAPEX - leasing commission
89
When an issuers share price trades substantially higher than their convertibles CP the bond most likely trades like
The stock
I.e the convertible is trading “off the stock”
90
If the earning yield is above the (after tax) cost of debt, what will a share repurchase do the the EPS
It will increase it
If they are equal, no change. And vice versa if the cost of debt is higher.
91
What is forced conversion
When the underlying share price exceeds the conversion price and there is an issuer call option too. As such, the investor must exercise in order get their payoff before the issuer calls the bonds in.
92
MCP ratio
MCP / P0
93
For a carry trade to be profitable, what parity condition must NOT hold?
UIRP => E(%.d.S_f/d) = if - id
94
How is FCFF/E affected by the NI from an associate?
The NI will proportionately increase. However, it will then be removed as a non-cash income in the formula. Thus, no change
95
FGW and PGW get used only when accounting for
Business combinations
As such, other investment good will is accounted for based off % of net assets vs FV paid (the same as PGW)
96
For justified ratios, what growth rate do you use?
Sustainable growth:
ROE x b = g
97
When valuing a cyclical at the peak of the cycle, how might you adjust the ratio
You will lower earnings which will raise the PE
98
CCY swaps +/- sign are
The other way than you’d think.
Because the CCY you ‘receive’ you pay interest for borrowing that CCY through the CP. So you will have a negative in front of the CCY you aim to receive
99
CCY swap formula
V_ccy.s = NA_p[fx * £DF + DF_L]
- Sd/f * NA_r[fx * £DF + DF_L]
Where _p is the the CCY you are paying and _r is the CCY you are receiving.
Note: the signs are around the other way because you receive the lump, pay interest, and return the NA at expiration (unique to CCY swaps).
Also note that the FX rate is d/f here. Just use what is required to equate the CFs
100
Optimal amount of active risk (restrained) formula
σ_a = (TC x IR x σ_b)/SR_b
101
Combined Sharpe Ratio formula
SR_c^2 = IR^2 x TC^2 + SR_b^2
102
Common Z-scores
99% = 2.33
95% = 1.65
90% = 1.29 or 1.3
103
AIC is used for
Predictive purposes
104
BIC is used for
Descriptive, conservative/parsimonious purposes
105
Joint F test null, alternative, and formula
H0: b1 = b2 … = bn = 0
Ha: b1 + b2 … + bn ≠ 0
Fj = ([SSEr - SSEu]/q)/(SSEu/[n-k-1])
Note the hypotheses are not written correctly because you could have stuff cancel you. To be clear, the null is that none of the excluded variables are significant. The alt is that any of them are different from zero.
106
In a steady state rate of growth what is equal?
kg = yg
Or the rate of growth of kapital per worker is equal to the rate of growth of output per worker
107
Dissect: Ø/(1-a) + n
This is the steady state growth rate. Where the left part Ø/(1-a) is the rate of growth of output per worker, and the n is the growth in labour supply.
108
Effect of savings rate on the endogenous model vs the neoclassical model
In endogenous model, increased savings can lead to permanent increased growth. In the neo, the savings rate increase will have no effect - THAT SAID, there will be an immediate affect before it reverts back over a period of time
109
What type of CAPM is used for private companies
Expanded CAPM
CAPM + additional premiums
Build up approach Beta is assumed to be 1. Otherwise is the same
110
Differences/changes in credit spreads are from
Expected loss from default, difference in taxation between corporate and bm bonds, liquidity (and uncertainty about these factors)
111
The benchmark yield captures
Expected real return, expected inflation, uncertainty about inflation (i.e., macro components)
112
a and diminishing returns in the CD function: read
MPK = a Y/K = r
The larger ‘a’, the less diminishing marginal returns to capital. Ie, the next unit I’ve kapital increase is almost as much as the last. The lower ‘a’, the lower MPK
113
Two time series are co-integrated if:
BOTH time series have a UNIT-ROOT and the RESIDUALS from a regression of one series on the other are STATIONARY (I.e., we would reject the null on the residuals regression)
114
Concluding a unit-root after a failed AR test
1. First difference and run the model again
2. If b0=0 & b1=0 you have a unit-root with MRL = 0
115
What doe’s conservative revenue recognition create
Unearned revenue which is a liability
116
If yt = xt - xt-1 this implies
yt = € & b0=0 & b1=0
Therefore, the MRL = 0
117
What are preconditions to being covariance stationary
Constant mean and variance
118
FCInv is equal to
FCInv = Change in PPE + Dep
FCInv = END PPE - BGN PPE + Dep
119
The R^2 on a unit root is…
Unintuitively high. This is due to the regression being a regression of tomorrows value on today’s. Of course, the best guess would be today’s value. However, the results are invalid due to it being a unit root. You must now first difference and re regress to confirm
120
Gross leases mean
The person paying the rent pays everything (ie all bills and rent)
Think tenant perspective. What am I paying for? Everything = gross
121
Gross leases mean
The person paying the rent pays everything (ie all bills and rent)
Think tenant perspective. What am I paying for? Everything = gross
Net rents mean the investor/landlord needs to charge extra for overheads to the tenant. As such, the tenant has a net lease pmt
122
CFA standards require what disclosure for third-party research and brokerage?
Must disclose research
Do not need to disclose brokerage
123
When share based comp is vesting, what happens to liabilities and equities?
Nothing happens to liabilities. Equity increases via the SBC reserve, increasing additional paid in capital. In the same period, the vested amount is an expense on the I/S. This reduces retained earnings, leaving the total equity unchanged.
124
Standard III(B) Fair Dealing
Deal with transactions between
clients
125
Standard IV(B) Priority of Transactions deals with transactions between
Yourself and clients
Or yourself and employer
126
CFA calls for IPS reviewal how often?
Annually
Unless clients circumstances change often or life events occur
127
Client information can be shared when
You’re in the same firm AND they are the firms clients
If they are YOUR clients, this would violate the P.O.C standard. And of course, you cannot share clients info with those outside the firm.
128
In order to receive additional compensation arrangements, a M/C needs permission in…
Writing, and needs to make a request in writing.
The note should have the details of the additional comp, the nature of the comp, the amount, and the duration.
129
Bias error is
The degree to which the the mode fits the TRAINING data
130
High bias error / high variance error
What-fitting / what-fitting
Under-fitting / over-fitting
131
Potential GDP growth via labour growth formula
Pot. GDPg = LTLFg + LTLFPg
Where LTLF is long term labour force and P is productivity
132
What must be disclosed in the footnotes regarding SBC
[read]
Type & extent, effect on the financial statements, how the the SBC is determined.
You do not have to say who, and how much they would receive.
133
Does the presence of serial correlation allow us to draw any conclusions about the variance of the error term?
NO!!!
This is because SC means the residuals are correlated but it could be the case that variance is still constant
134
What does serial correlation of the error term mean?
By definition, it means that the errors are correlated with the dependent variable. As such, if you are regressing a lag, this means the independent variable will also be correlated with the error term which is a violation of regression (ie, the variance of the error term is constant)
135
If you are long an option is theta +ve or -ve?
Theta is -ve
It is +ve if you are short
136
When CDS are settled what happens
In physical settlement, the CTD is exchanged for the difference to make the protection buyer whole (100%). As such, if the the holder also owns a tranche of bonds, and that tranche % of par is more than the CTD, they will prefer cash settlement. The reason is that the protection seller must top up the difference from the CTD.
137
Quoted futures price is quoted in terms of the…
Clean price
138
What to consider when determining whether non-public information is material
Is the information something you’d like to know as an investor
Is the source credible?
Is the affect on price ambiguous or not?
139
Voting proxies
If the costs outweigh the benefits of voting, a vote is not necessary
140
Multiple R is
SQRT(R^2)
Correlation coefficient…
141
What rate is used for NI in the CRM?
Average rate!
All I/S items use AR
142
Z-Spread is added to each rate on the ‘?’ - curve?
The spot curve
Not the par curve
143
Gamma is +ve when?
For long options
-ve for short options
And in extreme cases can be the other way around when dealing with exotic options
144
TPPC formula
TPPC = Current cost + Interest cost + past cost +/- A.L/AG - act.R(Assets)
Current cost = benefits earned
145
I - spread?
The difference between the swap spread and the bond in question / risky bond spread
146
When using the FCFF model what discount do you ALWAYS use?
WACC!!!!!
147
If first differencing ends with b0=0 & b1=0 (DNR) what do you have
You likely have a unit root (random walk)
148
Multicollinearity is
1. When the IVs are correlated
Thus, the regression finds it difficult to attribute explanatory power. As such, the variance is high and consequently the SE is high/inflated.
This can result in statistics that show as non-significant when really they are, you just need to remove the other correlated IVs
149
What violations result in inflated t-stats?
CH & SC
150
UIRP asserts what about the expected return on an uncovered foreign CCY investment?
It says it should equal the comparable domestic return.
Eg since %.d.Sf/d ≈ if - id
%.d.Sf/d + if ≈ id
151
Amortised cost is measured at
Par
Also FVPNL & FVOCI are measured at FV
152
What is the effective interest rate?
The market rate at the time of purchase
153
Reported income vs income received
Received income is CR x par
Reported income is ER x cv
154
SPEs under IFRS must be
Consolidated if they are conducted for the benefit of the sponsoring entity. Under IFRS, SPEs cannot be classified as qualifying. Under GAAP, qualifying SPEs (a now eliminated classification) do not have to be consolidated
155
What are cash outflows from operating activities in an IFRS DBPP?
Employer contributions.
Service costs are not. They are a non-cash expense.
IFRS employee comp is either cash outflow from op or fin
GAAP it is typical financing
156
Adjusting for hyper-inflation
(IFRS)
Use the GPI
use: end.of.period.GPI / avg.of.period.GPI
Multiply by latest exchange rate
157
How to treat R&D when dealing with NOPAT
When doing EVA analysis, add it back as it’s considered capex
When complying with IFRS, R is always expenses, D can be capitalised once feasibility is determined
When complying with GAAP, it is expenses as incurred
158
Are preferred shares included in Tier 1 capital?
Yes, so long as they don’t bear any requirements to pay
159
Hyperinflation for GAAP
No restatement. Use temporal rate method for translation (even if the fun. Ccy ≠ parent.reporting ccy)
160
Hyperinflation IFRS
Restate for inflation using end.GPI/avg.GPI
Then use CRM
161
NTK about SPEs
1. Consolidation occurs when power/control exists
2. Called VIE under GAAP
3. Consolidate assets, liabilities, revenues, expenses
4. Intra-entity transactions are eliminated!
162
Tax windfalls in IFRS vs GAAP effect on the effective tax rate
IFRS the windfall bypasses the I/S and goes straight to equity
GAAP it goes through PNL, as such, the effective tax rate is lower with GAAP
163
TSM for SCB [read]
For RSUs which have no cash proceeds, the average unrecognised SBC expense is used as a proceeds equivalent to buy back treasury stock in the market at the average share price
164
Sustainable g
g = E_1 / E_0
g = ROE x b
165
CFA C&S assert about research from parting analysts [read]
1. Can continue to be used if recent and relevant (ie do not need to redo all the work).
2. Do not need to attribute credit via naming the analyst(s)
166
[read] C&S
Non-violation: using a model at a new firm that was created independently in one’s free time - even if the past employer new about it. As long as it wasn’t used at the old firm.
Violation: Posting on social media that you are moving firms if you are still employed. Why? Because it could be seen as an attempt to solicit clients
167
[Read] C&S
Misconduct
Personal Bankruptcy - is not a violation if it is not deceitful and does not reflect poorly on a candidate’s reputation, integrity, or competence.
Arrests - are not violations if they do not reflect poorly on a candidates reputation, integrity, or competence. E.g, legal, non-violent protest trespassing arrests. The standard is not means to cover transgressions resulting from civil acts of disobedience in support of one’s personal beliefs.
168
[Read] C&S
Loyalty, prudence, and care
When brokers are acting for a non-discretionary account, they do not have a fiduciary duty and as such their duty is to provide best execution.
For example, if a client calls up asking to trade xyz and some negative news comes out and you cannot reach them. You must trade based off the original params set (p, q, timing, etc.)
169
[Read] Time-series
1. Random walk: b1 = b0 = 0
2. Random walk w/drift: b1 = 0 & b0 ≠ 0
3. Random walks are obviously not mean-reverting series
170
What is the difference between ARCH and normal-heteroskedasticity
ARCH relates to the variance depending on prior errors (lagged variables)
Heteroskedasticity relates to the error variance depending on the IVs (not lagged)
171
Precursors to a currency crises
Fixed exchange rate system
Large inflows of foreign capital
Broad money growth (M2)
172
Cost method and revaluation method [read]
Cost method (IFRS & GAAP):
- assets recorded at HC
- lower CV over time
- results in higher op-inc due to lower dep
Revaluation method (IFRS only):
- Assets revalued at fair market value
- higher CV and therefore BVE
- lower op-inc due to higher dep
173
FI portfolio types [read]
Bullet port:
- “targets” intermediate term maturities
- Outperforms when short & long term rates rise relative to intermediate term rates (curve flattens)
Barbell port:
- like a barbell… long and short term weighed
- underperforms when long and short ends both see rate rises
174
NAVPS - MV or BV?
Uses market values:
(MVA - MVD)/SO
Where you can get MVA via:
NOI x (1+g) / cap rate
175
AFFO = ?
AFFO = FFO - m.capex - NCR
FFO = NI + D&A +/- L/G
176
As a supervisor, what are your responsibilities if a potential wrongdoing is being investigated and the subject is one of your direct reports?
You must conduct a thorough investigation to determine if the compliance systems were adequate to prevent such violations. If so, address them.
Even if you are under investigation yourself.
177
What curve is used to derive the implied zero-cpn rates in a binomial interest rate tree?
The par curve, not the spot curve
178
How are recovery rates determined for bonds
They are based on the debt seniority and the issues/issuer’s asset characteristics… not credit ratings
Credit ratings (and credit scores) are to assess the probability of default
179
Steps in valuing a risky bond under the arb-free framework
1. Build a binomial interest rate tree with an assumed interest rate volatility
2. Use risk-neutral probabilities and recovery rates
3. Subtract the CVA from the VND
180
Credit risk models [read]
Structural model:
- resembles a call option
- explain why the default occurs
- rely on publicly available data (this being a pitfall that MVD may not be realistically available)
- B/S analysis
Reduced form models:
- Random/surprise event
- macroeconomic variables
- less restrictive assumptions
- focus on business cycle (when)
- regression analysis
181
OAS [read]
Z-spread = OAS_0
Z-spread = OAS_X + C_0
Where (is always) OAS_X < OAS_0
Because when you increase volatility for a call option the bond price will be adjusted down (assumed 100% of par), therefore, the rate will be lower to get the same bond price. As such, the above equality is true.
182
Priority of transactions [read]
Quirk: if there are clients accounts that have staff as beneficiaries (eg a family account), they must be treated as any other client account and traded at the same time as if they were client accounts
183
CVA formula
CVA = £(LGD x POD x DF)
w/ LGD = Exp.Exp x (1-RR)
184
FI Forward contract formula
F_0(T) = FV_0,T[S_0 - PVC_0,T]
PVC = cpn / (1 + r )^(t/T)
185
Amortisation of premium/discount of a bond held on the books under the effective interest method (formula)
[par x CR] - [eff. x purchase price] = amortisation of p/d
186
impairment for IFRS & GAAP
IFRS imp. = CV - Recoverable amt
1. GAAP IGW . = Net ass. - FV of reporting unit
2. GAAP imp. = CV - IGW
187
DLOC =
DLOC = 1 - [ 1 / (1 + CP) ]
188
Affects of cash/leverage and aggressiveness of active weights to sharpe ratio and information ratio
SR: no effect from changing csh or lev
IR: csh and lev affect the ratio, while agg. of active weights don’t
189
First differencing [read]
If you suspect a random walk from your first regression and you first difference and re-run, and the results are:
1. b0 & b1 = 0 (no significance)
2. No autocorrelations in the errors/residuals
You can conclude that the MRL is zero, and you have covariance stationarity
Yt = b0 + b1Yt-1+ £
Yt = 0 + 0 + £
Yt = £ … constant variance
Now what is the final conclusion here?? THAT THE ORIGINAL REGRESSION IS A RANDOM WALK AND THEREFORE A UNIT ROOT
190
Is the BSM model path dependent?
NO
But the Binomial model is of course
191
Client info [read]
If a client asks about another clients account in any probing way, make sure you don’t give up any client info unintentionally
Eg, if a client asks about a client and they have left, you can’t say no they’ve left…
192
Ex-post performance measure for variation due to constraint-induced noise
1-TC^2
193
High R^2, Significant F-stat, and insignificant t-stats for slope coefficients all together are evidence of
MC
194
High leverage point vs Outliers
Extreme values for IV vs Extreme values for DV
195
In a Likelihood ratio test (LR), what does a score closer to zero indicate?
Indicates a better fit
196
Normalisation vs standardisation formulas
Norm = (x - x min)/(x max - x min)
Strdize = (xi - mu) / std.dev
197
APPP
Sf/d = Pf / Pd
198
RPPP
%.d.Sf/d ≈ Pif - Pid
199
CCY crises warning signs: name 4 / read 5
1. Recent liberalisation of capital markets
2. Large foreign cap inflows
3. Banking crises either before or concurrent
4. Fixed or partially fixed FX rate
5. Sudden, share decline in FX reserves
6. Recent spike in domestic CCY value
7. Deteriorating terms of trade
8. Money supply growing faster than bank reserves
9. Recent high inflation
200
Classification of regulators [read]
Independent regulators: granted ability to make regulations by government
SRBs: private orgs that reg members
SROs: independent industry bodies that have been granted enforcement powers
Standard setting bodies: rules but no enforcement (IFRS)
201
FED MODEL
Compared market earnings yield to 10y treasury yield. If the earnings yield is lower than the 10y yield, the market is overvalued
202
Clean surplus relationship
Bt = Bt-1 + Et - Dt
203
Read
VA = today
Dominance = future
