Alternative Investments Flashcards
When can the cost approach to valuing property not be used?
When depreciation and/ or obsolescence are difficult to measure, e.g. when a building is old.
What is the formula for calculating the value of a building using the direct capitalisation method?
V = NOI / (r - g)
What is the calculation for physical deterioration?
Physical Deterioration = Replacement Cost x (Effective Age/ Economic Life)
What is calendar spread?
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
What is the insurance theory?
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.
What is the hedging pressure theory?
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).
What are the components of total return on a commodity derivative?
Total Return = Price Return + Roll Return + Collateral Return
What is roll return?
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.
What is a total return swap?
The variable payments are made based on the price change of a commodity.
What is an excess return swap?
The variable payments are made based on the difference between a commodity price and a benchmark value.
What is a basis swap?
The variable payments are made based on the price difference between two commodities.
What is the main difference between a REOC and a REIT?
A REOC reinvests the majority of its earnings whereas are REIT distributes the majority of its earnings.
Who incurs the operating expenses under a net lease - the landlord or the tenant?
The tenant.
What is the calculation for property value under the cost approach?
V = Replacement Cost + Value of Land - Physical Deterioration and Obsolescence
What are the three types of obsolescence?
- Functional (Design Defects)
- Locational
- Economic
What is the formula to calculate functional obsolescence?
Functional Obsolescence = Reduction in NOI/ Cap Rate
Which of the following is tax-advantaged:
- REITS
- REOCS
- Direct Property Investment
REITS and Direct Property Investment.
REOCS are NOT tax-advantaged.
Which has more seasonality - gas or oil?
Gas - It is used in winter for heating and in summer for electricity for cooling.
What is the formula for future price under the theory of storage?
F = S - Convenience Yield + Storage Costs
What is the formula for no. of contracts to hedge a portfolio benchmarked to an index?
No. of Contracts = Portfolio Value / Multiplier * Index Level
What is the formula for property value under the cost approach?
Value = Land Value \+ Replacement Cost (Inc. Builder Profit) \+ Curable Depreciation \+ Incurable Depreciation = Remaining Life/ Econ Life * Sum of Above \+ Obsolescence
In a forward arbitrage situation, do you borrow or lend the currency selling at a discount?
Borrow.
What does the N(d) part of the BSM represent?
The risk-neutral probability that the call/ put option will expire in the money.
Which type of property have the fewest unique characteristics?
Residential properties.
Which valuation method is not suitable for old buildings?
The cost model.
How do you calculate max loan amount based on debt service coverage?
- Calculate Max Debt Service based on target ratio = NOI / Target DSCR
- Calculate the Max Loan = Max Debt Service / Int. Rate
How do you know if leverage will increase RoE?
If required return > interest rate.
