Economics Flashcards
GDP (Expenditure Approach)
GDP = Personal consumption expenditure + Gross private domestic investment + Government purchases + (Exports − Imports)
GDP Deflator
GDP deflator is used to adjust nominal GDP to account for inflation and deflation over time.
Option, Re-pricing, Yield Curve Risk
Option risk
- occurs when a firm gives the customer the right (not the obligation) to change
the stream from assets, liabilities or off balance sheet items.
The option to pay off the loan without
a prepayment penalty
If a customer is allowed to prepay a mortgage without a prepayment penalty, that
gives the customer a call option. i.e. the right to pay the mortgage in full at any time
during the mortgage which changes the cash flow stream the firm receives from
the mortgage.
Re-pricing risk
- firm deliberately mismatches in an upsloping yield curve environment, by holding
assets with longer duration than the liabilities used to fund them.
Yield curve risk
- arises when the shape of the curve changes
- these changes bring to light any asset-liability mismatches a firm has
Black-Scholes (5) input variables
- Current stock price
- Related Stock options price
- Time to options expiration
- Risk free interest rate
- Volatility
Portfolio Theory
- risk can be reduced by combining investments into portfolios rather than
keeping them separate.
-Diversification is a desirable part of the process of creating portfolios but it is
not the objective in doing so.
Fair Value FASB ASC 820
- assumed that the hypothetical sale occurs in and orderly fashion , normal markets not under duress due to liquidation.
- assumed that hypothetical transactions is considered to have occurred in the principal market for such a transaction.
Zero Balance Accounts
- held at zero until a claim is made
- holding bank transfers funds from an interest bearing account
- at least two accounts and a fee is associated with the transfer
