Random questions Flashcards
BEY
Först hitta FV (måste annualize innan då) de gör man genom att FV x (1-days/yr x DR)
Calculate bonds price given a YTM on or between coupon dates
Example + formula
Open interest derivatives
OI is the total number of outstanding contracts that are held by market participants at the end of each trading day. Open interest can never exceed the total trading volume.
Olika namn för Flat price och Full price
Vad ger hög/låg credit risk
Företagets leverage (Eg Debt/capital, Debt/ebitda etc)
Equity Beta
The equity beta takes into account different levels of the company’s debt.
Asset Beta
The asset beta is the beta of a company on the assumption that the company uses only equity financing.
Beta estimation methods
For beta estimation, you can use either the market model regression of stock returns or the pure-play method.
How to calculate Beta
Sharpe ratio
M2
Treynors
Jensens alpha
Put call parity
CALL STRIKE - PUT STOCK
Forward put call parity
Byter ut stocken mot F0T och discountar tillbaka, även X ska discountas.
Degree of operating leverage (DOL)
DOL measures how sensitive a company’s operating income is to changes in product demand, as measured by unit sales. It is the ratio of the percentage change in operating income to the percentage change in units sold.
Degree of Financial Leverage (DFL)
The degree of financial leverage (DFL) assists a company in quantifying its financial risk, i.e., the risk relating to how it finances its operations.
DFL refers to the sensitivity of the cash flows available to the owners of a company when operating income changes.
Degree of Total Leverage (DTL)
If we combine a company’s degree of operating leverage with its degree of financial leverage, we get the degree of total leverage (DTL), which is a measure of the sensitivity of a company’s net income to changes in the number of units produced and sold.
Contribution margin
Contribution margin is a business’s sales revenue less its variable costs. The resulting contribution dollars can be used to cover fixed costs (such as rent), and once those are covered, any excess is considered earnings.
Relationship between yield curves
Par Yield Curve: Generally lower than the spot yield curve because it averages yields over multiple years.
Spot Yield Curve: Generally lower than the forward yield curve because it reflects current rates for zero-coupon bonds.
Forward Yield Curve: Reflects future expected interest rates and tends to be higher.
Macdur
Moddur
PVPB
mac d worksheet example
valuing using binomial
Hedge ratio with binomial model
H = (C+ – C-) / (S+ – S-)
With this hedge ratio, you can long H units of the shares to hedge against a short position in a call option. The hedge ratio works similarly for put options, just with a negative hedge ratio value.
Finding probabilities for binomial model
IF Taxable income is greater than Accounting profit, what happens?
IF Accounting profit is greater than Taxable income , what happens?
Leverage ratio
Margin call price
Justified P/E
Flexibility Option
Definition: Flexibility options allow companies to adapt their operations to changes in the market environment. This includes the ability to change prices, modify production levels, or switch to alternative inputs or outputs based on market conditions.
Sizing Option
Definition: Sizing options allow companies to alter the scale of their operations. This includes options to expand, contract, or abandon a project.
Aggregate demand
Aggregate demand is the total amount that households and businesses intend to spend
Fiscal Policy
Fiscal policy can boost overall demand through:
Decreasing corporation taxes stimulates business profits and expenditures.
Introducing new public expenditures for social welfare and infrastructure projects.
Reducing personal income tax resulting in increased disposable income.
Lowering sales taxes leads to decreased prices for consumers.
Note that the effectiveness of the Fiscal policies on aggregate demand, changes over time, and economy to economy.
Automatic Stabilizers
Automatic stabilizers are fiscal policies that automatically adjust tax rates and transfer payments in a manner that is intended to stabilize incomes, consumption, and business spending over the business cycle.
Note that automatic stabilizers work automatically, without the need for policymakers to identify shocks.
For instance, when the economy slows down and unemployment rises, the government’s spending on social insurance and unemployment benefits will increase. This will boost aggregate demand, helping to prevent the economy from contracting further.
How to find CAL?
The optimal portfolio will have the highest sharpe ratio
Defined Contribution Pension Plan
A Defined Contribution (DC) pension plan is an investment vehicle in which the amounts invested, or the contributions that the employee makes to the plan, are defined or specified, but the benefits are not predetermined. The objective of the pension plan is to accumulate wealth by investing a portion of wages while working to provide income during retirement. Unlike a Defined Benefit (DB) pension plan, where the retirement benefits are predetermined based on factors such as salary and years of service, a DC plan places the investment risk on the employee. The employee is responsible for ensuring that their contributions and investment growth are sufficient to provide the desired income upon retirement. The final retirement income in a DC plan depends on the contributions made, investment performance, and the choices made by the employee regarding investment options within the plan.
Defined Benefit Pension Plan
In a DB pension plan, the employer has an obligation to provide certain benefits to employees when they retire. The future benefit is specified or defined. The investment management of DB plans has to consider the timing of its future liabilities or cash flows by assessing the age of its plan members. If, for example, a DB pension plan has a lot of young members, the investment time horizon of the plan may be quite long. The plan investment manager may try to match the cash flow requirements of the plan with cash-flow-producing assets such as bonds. This checks the capacity of portfolio assets to offset portfolio liabilities.
Conflict between willingness and ability for risk
According to prudent investment principles, when there is a conflict between willingness and ability to take risk, the ability to take risk should be given more weight. This is because regardless of how willing someone is to take on risk, if they do not have the financial capacity to withstand potential losses, their overall risk tolerance should be considered lower.
Operating income
=EBIT
EBITDA
Soft Hurdle Rate
Definition: A soft hurdle rate is a minimum return that must be achieved before a performance fee is charged. However, once this rate is met, the performance fee is calculated on the entire return, not just the portion above the hurdle.
Example: Imagine an investment fund with a soft hurdle rate of 5%. If the fund earns a 10% return, the performance fee is calculated on the entire 10%, not just the 5% above the hurdle
Hard Hurdle Rate
Definition: A hard hurdle rate is a stricter version where the performance fee is only charged on the returns above the hurdle rate.
Example: Using the same 5% hurdle rate, if the fund earns 10%, the performance fee is only applied to the 5% return that exceeds the hurdle.
Clawback
Definition: A clawback is a provision that ensures investors can recover performance fees paid in earlier years if the fund underperforms in subsequent years.
Example: If an investor pays a performance fee in a year when the fund performs well but the fund performs poorly in later years, the clawback provision allows the investor to reclaim some of those fees to make up for the losses.
A well functioning financial system has what?
A well-functioning financial system has complete markets with effective financial intermediaries and financial instruments, allowing:
Investors to move money from the present to the future at a fair rate of return.
Borrowers to easily obtain capital.
Hedgers to offset risks.
Traders to easily exchange currencies and commodities.
Current yield
Futures vs forwards prices
If interest rates were constant, futures and forwards would have the same prices. The pricing differential between the two varies with the volatility of interest rates. Practically, the derivatives industry makes virtually no distinction between futures and forward prices.
Futures Contracts: These settle daily, meaning the gains or losses are calculated at the end of each trading day. Any gains are added to the margin account, and losses are deducted from it.
Reinvestment of Gains: Because of daily settlements, any increase in value can be immediately reinvested, which can affect the overall return on the investment.
Bra att veta del:
FUTURE IS POSITIVE
FORWARD IS NEGATIVE
Futures contracts can be either more or less expensive than forward contracts, depending on factors such as interest rates, cost of carry, and the ability to reinvest gains. Generally:
More Expensive: When interest rates are high, making the cost of maintaining margin accounts higher.
Less Expensive: When the opportunity to reinvest daily gains outweighs the cost of maintaining the margin account, typically in stable or low-interest-rate environments.
Pay off vs profit
Trade agreements in order
Trade agreements can be categorized by the degree of economic integration among the participants. Each type of agreement in the following list includes the provisions in the previous type of agreement, so that monetary union is the most integrated and includes all the provisions listed.
Free trade area: All barriers to import and export of goods and services among member countries are removed.
Customs union: In addition, all member countries adopt a common set of trade restrictions with non-members.
Common market: In addition, all barriers to the movement of labor and capital goods among member countries are removed.
Economic union: In addition, member countries establish common institutions and economic policy.
Monetary union: In addition, member countries adopt a single currency.
HHI meaning
The Herfindahl-Hirschman Index (HHI) is a measure of market concentration used to determine the competitiveness of an industry. It is calculated by summing the squares of the market shares of all firms within the industry. (The higher the number, the more concentrated it is.Ie more monopolistic)
Leading indicators
Leading indicators include share prices, average weekly hours worked in the manufacturing sector, or new orders for capital goods. The function of leading indicators is to predict the future movements of the economy.
Lagging indicators
Lagging indicators only change when the economy has started following a certain pattern. Even though they are more precise than leading indicators, they can only be seen after a large economic shift has occurred. They include unemployment rates, interest rates, gross national product (GNP), the balance of trade, consumer price index (CPI), and gross debt.
Coincident Indicators
Coincident indicators constitute elements such as gross domestic product (GDP), retail sales, and employment levels. They can be seen simultaneously as the size of the economy either expands or contracts.
Fiscal multiplier meaning
The fiscal multiplier measures the ratio of the change in equilibrium output to the change in autonomous spending that caused the change. If the multiplier is greater than one, it indicates that a change in government spending or taxation has a magnified effect on output. The opposite is true if the ratio is less than one. We’d expect a change in government spending or taxation to have no effect on the overall output when the multiplier is equal to zero.
SML
The Security Market Line (SML) is the graphical representation of the CAPM with beta reflecting systematic risk on the x-axis and expected return on the y-axis. The SML intersects the y-axis at the risk-free rate, and the slope of the line is the market risk premium, Rm – Rf.
Loss aversion
refers to the irrational dislike of losses in a portfolio. It manifests when an investor, despite recognizing a stock’s positive metrics and including it in their portfolio, impulsively sells it when it faces a downturn. Goals-based investing offers a solution to this bias by ensuring that the investor’s priorities remain the focus, thus discouraging them from deviating from their strategic asset allocation during market downturns. By clearly focusing on their goals, investors can mitigate the impact of loss aversion and make more rational investment decisions.
Illusion of control
refers to the erroneous belief that positive investment performance is primarily attributed to investors’ ability to influence events beyond what is realistically possible. This bias is often observed among risk-seeking investor types, particularly active accumulators. The illusion of control manifests in excessive trading and a failure to diversify the portfolio adequately. Investors under this bias overestimate their control over investment outcomes, leading to suboptimal decisions and increased risk exposure.
Mental accounting
refers to the tendency of investors to categorize their wealth into arbitrary compartments mentally. An example of mental accounting is when investors hold onto low-yielding government bonds received as a birthday gift while using high-interest credit cards. This bias can lead to suboptimal financial decisions since it overlooks the financial picture and focuses on individual categories in isolation. However, goals-based investing is designed to effectively address this bias by emphasizing the investor’s broader financial goals and priorities, encouraging a more holistic and rational approach to wealth management.
Representativeness bias
Representativeness bias refers to the tendency to classify new information based on past experiences and classifications. New information may resemble or seem representative of familiar elements already classified, but in reality, it can be very different. In these instances, the classification reflex can deceive, producing an incorrect understanding that biases all future thinking about the information. Base-rate neglect and sample-size neglect are two types of representativeness bias that apply to FMPs.
Framing bias
pertains to the tendency of investors to evaluate information based on how it is presented rather than its objective content. This bias can lead to different perceptions and decisions based on the framing of the information. For instance, consider the classic question of whether the glass is half-full or half-empty. An investor influenced by framing bias may be more inclined to focus on a situation’s negative aspect (half-empty) or the positive aspect (half-full), depending on how it is presented.
Availability bias
refers to the tendency of individuals to rely on information that is easily accessible or readily available. According to this theory, widely disseminated information is often given more credibility than information that requires effort. Ideally, the importance and credibility of information should not be solely determined by its availability. Instead, it should be evaluated based on its value and usefulness in making informed decisions.
Utility
Utility is a measure of relative satisfaction that an investor derives from different portfolios. We can generate a mathematical function to represent this utility that is a function of the portfolio’s expected return, the portfolio variance, and a measure of risk aversion.
Risk management process / framework
Diversification ratio
You want to think of the ratio as the percent volatility your portfolio has when compared to sticks within it. In this case the portfolio has 2/3 the volatility.
A lower ratio means lower correlations and better diversification
Empirical vs. Analytical Duration
Analytical Duration:
Definition: A theoretical measure calculated using a formula.
How It Works: Assumes bond prices change based on interest rates without considering real market conditions.
When Used: Good for stable, low-risk bonds like government bonds.
Empirical Duration:
Definition: A practical measure based on real market data and historical bond price movements.
How It Works: Considers how bond prices actually change in the real world, including factors like credit risk.
When Used: Better for riskier bonds like corporate bonds, especially in unstable markets.
Make-Whole Call
Definition: A feature in some bonds that lets the issuer repay the bond early, but with a penalty to make the investor “whole” (compensated for the early repayment).
How It Works: If the issuer wants to call the bond (repay it early), they have to pay the bondholder not just the face value, but also an additional amount to cover the interest the bondholder would miss out on.
Lock up period
This is the period after investment in which withdrawals may not be made. Hard lockups mean no redemption is possible, and soft lockups mean a penalty is assessed, although withdrawal is permitted.
Gates
Limits on withdrawal sizes.
Min max price of put option
Min max price of a call option
Call options reaction to rise in Interest rates
Goes up
Put options reaction to rise in Interest rates
Goes down
Different options for investing
Companies with high volatility has a preference for what type of capital?
Calculate covariance of a portfolio
Först få fram expected return, sen tar man deviations från dess expected return och har det weighted mot dess probability
Goals of central banks
Country behaviour
Bayes formula for updated investment information
EV of public company
SCL
Very similar to SML, its but used for determining excess return of an investment compared to market.
SCL is based on CAPM. Its slope is Beta, as it is comparing a certain investment to the market.
SML
SML is based on CAPM, it is a graphical representation of systematic risk and expected return. Its slope is E(rm-rf) as it is the market.
Portfolio variance
Effective annual yield
𝐸𝐴𝑌 = (1 + 𝑃𝑒𝑟𝑖𝑜𝑑𝑖𝑐 𝑟𝑎𝑡𝑒)𝑚 − 1
BEY (example)
First find PV and then find HPY, to then calculate back the days
Duration properties, (What affects the duration)
Coupon Rate,
Explanation: Higher coupon rates result in larger, more frequent cash flows earlier in the bond’s life, reducing the bond’s duration since the present value of these payments is a larger proportion of the bond’s total value, thus leading to an inverse relationship with duration.
Yield to Maturity,
Explanation: As yield increases, the present value of a bond’s future cash flows decreases, which weights the cash flows more towards the earlier periods and reduces duration due to the time value of money, resulting in an inverse relationship.
Time-to-Maturity,
Explanation: A longer time to maturity typically means more cash flows are due further in the future, increasing a bond’s sensitivity to interest rate changes, thus increasing duration, indicating a direct relationship.
Fraction of Current Coupon Period that has Elapsed,
Explanation: As more of the coupon period elapses, the remaining time until the next cash flow decreases, effectively reducing the time-weighted average of future cash flows and therefore decreasing the bond’s duration, showing an inverse relationship.
Difference between inventory impairment and noncurrent assets.
Effective duration
Price value per basis point
Convexity
Standard devation of a portfolio
Value at risk
Market cap formula
Corporate governance benfits and risks
Calculate the forward rate
real exchange rate calculation
Approximate real exchange rate
Type 1 and type 2 errors
Calculate min max for Call option
Calculate min max for Put option
