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CFA1 Flashcards

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1
Q

IFRS DB plan service cost treatment

A

PNL

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2
Q

IFRS DB plan service cost treatment

A

PNL

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3
Q

GAAP DB plan service cost treatment

A

Current: PNL & Past: OCI

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4
Q

IFRS DB plan Net I/E treatment

A

PNL

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5
Q

GAAP DB plan Net I/E treatment

A

PNL

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6
Q

IFRS/GAAP DB plan Net I/E treatment

A

PNL

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7
Q

IFRS/GAAP DB plan remeasurement treatment

A

OCI

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8
Q

Net I/E formula IFRS (DBPP)

A

Net A/L x DR

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9
Q

Net I/E formula GAAP (DBPP)

A

Net A x E(R) - Net L x DR

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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

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11
Q

IFRS/GAAP DR is based off?

A

Yield on IG Corp Bond

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12
Q

MLM - HCM: EFP & EMP

A

EFP & EMP = Intermediate (?)

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13
Q

MLM - HCM: RFP & EMP

A

RFP & EMP = CCY DEPR.

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14
Q

MLF - LCM Based off?

A

Trade flows

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15
Q

MFM - HCM based off?

A

Capital flows

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16
Q

MFM - LCM EMP & EFP

A

Imports up, CCY down

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17
Q

MFM - LCM RMP & RFP

A

Imports down, CCY up

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18
Q

MFM - HCM RMP & EFP

A

CCY APPR.

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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

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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

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21
Q

Delta increases as options go more…

A

ITM (ceteris paribus)

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22
Q

ATM call option delta at maturity is equal to

A

0.5

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23
Q

E(Δ in DPS) formula

A

E(Δ in DPS) = [E(EPS) x target - D_0] x 1/n

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24
Q

CRM is used when

A

Subsidiary functional CCY differs from parents reporting CCY

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25
Q

TRM is used when

A

Subsidiary functional CCY is the same as the parents reporting CCY

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26
Q

CRM - CTA adj. on what statement?

A

B/S (CTA)

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27
Q

CTA adj steps

A

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

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28
Q

I/S translation G/L steps

A

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

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29
Q

CRM conventions

A

I/S use AR (including NI)
B/S use HR for CS
B/S use CR for everything else

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30
Q

TRM conventions B/S

A

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

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31
Q

TRM conventions I/S

A

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

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32
Q

What formula is this:

(AP)⋅PVA⋅(Rfix)⋅N(d1) −(AP)⋅Xr⋅PVA⋅N(d2)

A

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.

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33
Q

What formula is this:

(AP)⋅PVA⋅Xr⋅N(d2)−(AP)⋅PVA⋅Rfix⋅N(d1)

A

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.

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34
Q

M&C who engage in independent practice while still employed must:

A
  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

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35
Q

To detect SC in an AR model

A

Look for t-stats of the autocorrelations of the residuals being greater than the critical value

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36
Q

What models is the DW test not suitable for?

A

AR models!

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37
Q

Steps to run a DF test for a unit root

A
  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.

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38
Q

MRL formula

A

MRL = b0/(1-b1)

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39
Q

IFRS ending DBPP asset formula

A

BGN x [1+act(R)] + contributions - benefits paid

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40
Q

IFRS ending DBPP liability formula

A

BGN x (1+DR) + benefits earned - benefits paid

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41
Q

IFRS total period pension cost formula

A

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.

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42
Q

The grant date fair value of an RSU is

A

It’s market value and it does not change over time.

As such, RSUs will be a greater I/S expense than a ESO

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43
Q

What is ignored when combining B/Ss in the acquisition method and why?

A

Ignore equity. Why? Because it’s folded into the concept of net assets which was used to get goodwill

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44
Q

Partial GW formula

A

PGW= FV(paid) - NIA x %.of.acq

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45
Q

Full GW formula

A

FGW = amt.paid/%.of.acq - NIA

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46
Q

Where does the difference between FGW & PGW ultimately end up?

A

It funnels down to NCI

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47
Q

NCI - FGW formula

A

NCI.F = amt.paid/%.acq x (1 - %.acq)

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48
Q

NCI - PGW

A

NCI.P = NIA x (1 - %.acq)

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49
Q

In a steady state what is the MPK equal to?

A

MPK = r

Capital is just being paid it’s required rate of return

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50
Q

In a steady state Y/K is a

A

Constant

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51
Q

In a steady state, what affect will capital deepening have on the economy?

A

None. Both k (d.K/L) and y (d.Y/L) grow at theta/(1-a)

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52
Q

Steady state rate of growth of output formula

A

Theta/(1-a) + d.L/L

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53
Q

If UIRP and CIRP hold

A

Then forward rate parity would prevail - the fwd fx rate would equal the expected future spot fx rate, serving as an unbiased predictor

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54
Q

CDS upfront pmts

A
  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.

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55
Q

The CTD on a CDS is chosen based off?

A

Any debt obligation issued by the borrower ranked equivalently in priority of claims (p.p) or higher!! Then choose CTD

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56
Q

Change in value of CDS (for buyer)

A

d.spread x Duration x NA

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57
Q

N(d1) + N(-d1) =

A

100%

CDF

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58
Q

Surrender value is the amount

A

The policy holder receives if they surrender the policy - it is equal to the current cash value or NPV based off actuarial estimates

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59
Q

Life settlements in hedge funds aim to

A

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

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60
Q

In a replication strategy what how do you make it so the cash outlay is equal to the position you’re attempting to replicate?

A

You must invest or borrow the remaining balance

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61
Q

If bias error is high and variance error is high, what could a modeler use to reduce the variance error?

A

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)

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62
Q

Roll return formula

A

(Near - far)/near x %.being.rolled

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63
Q

Merger arb via options

A

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.

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64
Q

When are American and European calls options the same price?

A

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).

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65
Q

What does conditional heteroskedasticity cause in the test stats?

A

It understates variance, therefore, over stating (inflating) t-stats

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66
Q

Equity method of accounting

A

~20 - 50% or “significant influence, but no control”

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67
Q

Conversion Value formula

A

P0 x CṞ

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68
Q

Conversion Ratio form.

A

CṞ = Par / CP

CP & CR are fixed

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69
Q

MC$ formula

A

MC$ = PV0 / CṞ

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70
Q

MCP form.

A

MCP = MC$ - P0

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71
Q

Weighted Harmonic mean vs Xh

A

WHM = 1 / £(w/x)

Xh = n / £(1/x)

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72
Q

EVA formula

A

EVA = MVIC - [WACC x BVIC]

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73
Q

Combined Ratio

A

Comb.R. = UWE/NPW + L&L.a.E/NPE

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74
Q

Value of a Swap formula

A

V_s = (rfx_t - rfx_o) x £DF x NA

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75
Q

Value of an Equity Swap

A

V_eq.s = NA.(St/So) - NA.(rfx x £DF + DF_L)

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76
Q

When no significant influence is deemed, and an investment is accounted for using FV2OCI, where do dividends go?

A

Dividends go to PNL still because they are income not capital

77
Q

Steps for interpolating matrix pricing

A
  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
Q

ERP gk Formula

A

ERP_gk = [DY + PEg + i + g + %.d.S] - rf

79
Q

EVA =

A

NOPAT - (C% x TC)
or
MVIC - (BVIC x WACC)
Where NOPAT = EBIT(1-t)

80
Q

FCFF is used over FCFE when

A

The firms cap structure is in flux!

FCFE and FCFF can both be used for a levered company

81
Q

How is amortisation prem./discount treated for FCFF

A

It is part of the interest expense component. As such, the discount (nc expense) is added back. The premium (nc income) is subtracted.

82
Q

What does refinancing shorter maturities into longer maturities do to the yield curve?

A

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
Q

Quoted Futures formula

A

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
Q

DF test model

A

Xt- Xt-1 = b0 + g1.Xt-1 + €

Where E(€) = 0

85
Q

What is the Dutch Disease

A

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
Q

Endogenous growth model asserts

A

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
Q

What is restated for inflation vs what is not under IFRS

A

Restated: Land

Not restated: Cash and monetary items

88
Q

AFFO formula

A

AFFO = NI + D&A (+/- L/G on dep. assets) - NCR - m.CAPEX - leasing commission

89
Q

When an issuers share price trades substantially higher than their convertibles CP the bond most likely trades like

A

The stock

I.e the convertible is trading “off the stock”

90
Q

If the earning yield is above the (after tax) cost of debt, what will a share repurchase do the the EPS

A

It will increase it

If they are equal, no change. And vice versa if the cost of debt is higher.

91
Q

What is forced conversion

A

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
Q

MCP ratio

A

MCP / P0

93
Q

For a carry trade to be profitable, what parity condition must NOT hold?

A

UIRP => E(%.d.S_f/d) = if - id

94
Q

How is FCFF/E affected by the NI from an associate?

A

The NI will proportionately increase. However, it will then be removed as a non-cash income in the formula. Thus, no change

95
Q

FGW and PGW get used only when accounting for

A

Business combinations

As such, other investment good will is accounted for based off % of net assets vs FV paid (the same as PGW)

96
Q

For justified ratios, what growth rate do you use?

A

Sustainable growth:

ROE x b = g

97
Q

When valuing a cyclical at the peak of the cycle, how might you adjust the ratio

A

You will lower earnings which will raise the PE

98
Q

CCY swaps +/- sign are

A

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
Q

CCY swap formula

A

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
Q

Optimal amount of active risk (restrained) formula

A

σ_a = (TC x IR x σ_b)/SR_b

101
Q

Combined Sharpe Ratio formula

A

SR_c^2 = IR^2 x TC^2 + SR_b^2

102
Q

Common Z-scores

A

99% = 2.33
95% = 1.65
90% = 1.29 or 1.3

103
Q

AIC is used for

A

Predictive purposes

104
Q

BIC is used for

A

Descriptive, conservative/parsimonious purposes

105
Q

Joint F test null, alternative, and formula

A

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
Q

In a steady state rate of growth what is equal?

A

kg = yg

Or the rate of growth of kapital per worker is equal to the rate of growth of output per worker

107
Q

Dissect: Ø/(1-a) + n

A

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
Q

Effect of savings rate on the endogenous model vs the neoclassical model

A

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
Q

What type of CAPM is used for private companies

A

Expanded CAPM

CAPM + additional premiums

Build up approach Beta is assumed to be 1. Otherwise is the same

110
Q

Differences/changes in credit spreads are from

A

Expected loss from default, difference in taxation between corporate and bm bonds, liquidity (and uncertainty about these factors)

111
Q

The benchmark yield captures

A

Expected real return, expected inflation, uncertainty about inflation (i.e., macro components)

112
Q

a and diminishing returns in the CD function: read

A

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
Q

Two time series are co-integrated if:

A

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
Q

Concluding a unit-root after a failed AR test

A
  1. First difference and run the model again
  2. If b0=0 & b1=0 you have a unit-root with MRL = 0
115
Q

What doe’s conservative revenue recognition create

A

Unearned revenue which is a liability

116
Q

If yt = xt - xt-1 this implies

A

yt = € & b0=0 & b1=0

Therefore, the MRL = 0

117
Q

What are preconditions to being covariance stationary

A

Constant mean and variance

118
Q

FCInv is equal to

A

FCInv = Change in PPE + Dep

FCInv = END PPE - BGN PPE + Dep

119
Q

The R^2 on a unit root is…

A

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
Q

Gross leases mean

A

The person paying the rent pays everything (ie all bills and rent)

Think tenant perspective. What am I paying for? Everything = gross

121
Q

Gross leases mean

A

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
Q

CFA standards require what disclosure for third-party research and brokerage?

A

Must disclose research

Do not need to disclose brokerage

123
Q

When share based comp is vesting, what happens to liabilities and equities?

A

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
Q

Standard III(B) Fair Dealing

Deal with transactions between

A

clients

125
Q

Standard IV(B) Priority of Transactions deals with transactions between

A

Yourself and clients
Or yourself and employer

126
Q

CFA calls for IPS reviewal how often?

A

Annually

Unless clients circumstances change often or life events occur

127
Q

Client information can be shared when

A

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
Q

In order to receive additional compensation arrangements, a M/C needs permission in…

A

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
Q

Bias error is

A

The degree to which the the mode fits the TRAINING data

130
Q

High bias error / high variance error

What-fitting / what-fitting

A

Under-fitting / over-fitting

131
Q

Potential GDP growth via labour growth formula

A

Pot. GDPg = LTLFg + LTLFPg

Where LTLF is long term labour force and P is productivity

132
Q

What must be disclosed in the footnotes regarding SBC

[read]

A

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
Q

Does the presence of serial correlation allow us to draw any conclusions about the variance of the error term?

A

NO!!!

This is because SC means the residuals are correlated but it could be the case that variance is still constant

134
Q

What does serial correlation of the error term mean?

A

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
Q

If you are long an option is theta +ve or -ve?

A

Theta is -ve

It is +ve if you are short

136
Q

When CDS are settled what happens

A

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
Q

Quoted futures price is quoted in terms of the…

A

Clean price

138
Q

What to consider when determining whether non-public information is material

A

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
Q

Voting proxies

A

If the costs outweigh the benefits of voting, a vote is not necessary

140
Q

Multiple R is

A

SQRT(R^2)

141
Q

What rate is used for NI in the CRM?

A

Average rate!

All I/S items use AR

142
Q

Z-Spread is added to each rate on the ‘?’ - curve?

A

The spot curve

Not the par curve

143
Q

Gamma is +ve when?

A

For long options
-ve for short options

And in extreme cases can be the other way around when dealing with exotic options

144
Q

TPPC formula

A

TPPC = Current cost + Interest cost + past cost +/- A.L/AG - act.R(Assets)

Current cost = benefits earned

145
Q

I - spread?

A

The difference between the swap spread and the bond in question / risky bond spread

146
Q

When using the FCFF model what discount do you ALWAYS use?

A

WACC!!!!!

147
Q

If first differencing ends with b0=0 & b1=0 (DNR) what do you have

A

You likely have a unit root (random walk)

148
Q

Multicollinearity is

A
  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
Q

What violations result in inflated t-stats?

A

CH & SC

150
Q

UIRP asserts what about the expected return on an uncovered foreign CCY investment?

A

It says it should equal the comparable domestic return.

Eg since %.d.Sf/d ≈ if - id

%.d.Sf/d + if ≈ id

151
Q

Amortised cost is measured at

A

Par

Also FVPNL & FVOCI are measured at FV

152
Q

What is the effective interest rate?

A

The market rate at the time of purchase

153
Q

Reported income vs income received

A

Received income is CR x par

Reported income is ER x cv

154
Q

SPEs under IFRS must be

A

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
Q

What are cash outflows from operating activities in an IFRS DBPP?

A

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
Q

Adjusting for hyper-inflation

(IFRS)

A

Use the GPI

use: end.of.period.GPI / avg.of.period.GPI

Multiply by latest exchange rate

157
Q

How to treat R&D when dealing with NOPAT

A

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
Q

Are preferred shares included in Tier 1 capital?

A

Yes, so long as they don’t bear any requirements to pay

159
Q

Hyperinflation for GAAP

A

No restatement. Use temporal rate method for translation (even if the fun. Ccy ≠ parent.reporting ccy)

160
Q

Hyperinflation IFRS

A

Restate for inflation using end.GPI/avg.GPI

Then use CRM

161
Q

NTK about SPEs

A
  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
Q

Tax windfalls in IFRS vs GAAP effect on the effective tax rate

A

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
Q

TSM for SCB [read]

A

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
Q

Sustainable g

A

g = E_1 / E_0

g = ROE x b

165
Q

CFA C&S assert about research from parting analysts [read]

A
  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
Q

[read] C&S

A

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
Q

[Read] C&S

A

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
Q

[Read] C&S

A

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
Q

[Read] Time-series

A
  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
Q

What is the difference between ARCH and normal-heteroskedasticity

A

ARCH relates to the variance depending on prior errors (lagged variables)

Heteroskedasticity relates to the error variance depending on the IVs (not lagged)

171
Q

Precursors to a currency crises

A

Fixed exchange rate system

Large inflows of foreign capital

Broad money growth (M2)

172
Q

Cost method and revaluation method [read]

A

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
Q

FI portfolio types [read]

A

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
Q

NAVPS - MV or BV?

A

Uses market values:

(MVA - MVD)/SO

Where you can get MVA via:

NOI x (1+g) / cap rate

175
Q

AFFO = ?

A

AFFO = FFO - m.capex - NCR

FFO = NI + D&A +/- L/G

176
Q

As a supervisor, what are your responsibilities if a potential wrongdoing is being investigated and the subject is one of your direct reports?

A

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
Q

What curve is used to derive the implied zero-cpn rates in a binomial interest rate tree?

A

The par curve, not the spot curve

178
Q

How are recovery rates determined for bonds

A

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
Q

Steps in valuing a risky bond under the arb-free framework

A
  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
Q

Credit risk models [read]

A

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
Q

OAS [read]

A

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
Q

Priority of transactions [read]

A

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
Q

CVA formula

A

CVA = £(LGD x POD x DF)

w/ LGD = Exp.Exp x (1-RR)

184
Q

FI Forward contract formula

A

F_0(T) = FV_0,T[S_0 - PVC_0,T]

PVC = cpn / (1 + r )^(t/T)

185
Q

Amortisation of premium/discount of a bond held on the books under the effective interest method (formula)

A

[par x CR] - [eff. x purchase price] = amortisation of p/d

186
Q

impairment for IFRS & GAAP

A

IFRS imp. = CV - Recoverable amt

  1. GAAP IGW . = Net ass. - FV of reporting unit
  2. GAAP imp. = CV - IGW
187
Q

DLOC =

A

DLOC = 1 - [ 1 / (1 + CP) ]

188
Q

Affects of cash/leverage and aggressiveness of active weights to sharpe ratio and information ratio

A

SR: no effect from changing csh or lev

IR: csh and lev affect the ratio, while agg. of active weights don’t

189
Q

First differencing [read]

A

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

CFA (1 decks)

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