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    2010 L1 Quicksheet PDF

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    tessat97

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    © All Rights Reserved
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    ALEVE | ~ SCHWESER’S QuickSheet™ _| CriticaL CONCEPTS FOR THE 2010 CFA® Exam T | a) Romig oe La, 1) Ind Ene ce and Object 1 (© Marepreenaton. 10) oe 1 i serene (B) Market Manipulation. i is Bele ) FerDeling neo 1 Ce nem, TIL (B) Preservation of Confidentiality. 4S ec IV (A) Loyalty. 1 Conon onan Wy eect "eee see , y and Action (A) Diligence and Reasonable Basis (B) Communication with Clients and Prorpetive Clients. CUE St) 29 "Time Value of Money Basics + Fucwre value (FV): amount to which investment yo af one or more compounding pts, ‘evenly spaced inerals overtime + Ordinary anny cath Bow ac end-f-ime peo. + Ari de: cath How ac bepinning-oF time peti, ‘+ Pepetntes: annuities with an infinite lives PViop = PMT discount rt), Required Rate of Return (Components 1. Reals fee rate (RER). 2 Expected inflation rate premium (1P) 3. Rik premium. Formula for nominal RER: RER gy = (+ RE) 1P)—1 Risk Premium Investors demand ok premium forthe unceainy ascocaed with investment areses fron sach as busines, Sania, guid, exchange ate, and oan 2) = (14 RPR)LFINO+RE—1 Approximation formula for nomial requiem: E(R)ERER+ IP +RP Means Arithmetic ean: sc ofall observation values in ‘ampllpoplation, divided by #ofoberations. Geomerse mean: sed when cleliting investment etn oer mull periods or vo measure compound pow ates CGeomerie mean ren Rex [O4R))x--x(14R, par eV STRICT + Penola + Prensa - cash Bow PV i 1 + Armies sres of equal cash ows that ocr at VI (B) Priority of Transactions V1 (O) Referal Fes ne VI Res at a CFA Institute ‘Member or CEA ‘UI (A) Condct as Members and Candidates. the CFA Progam. 2 ‘VII (B) Refeience to CFA Insure, the CFA. clesignation, and the CFA Program, Global Investment Performance Standards (GIPS") eee eee Sohn Sat pee rae ey IGA phat tnt ere were ee ‘Variance and Standard Deviation Variance average of equated deviations frm mean, VividBoo Lew pa ed sample variance Standard deviation: square root of variance Holding Period Recurn (HPR) rey Coefficient of Variation CCoficen of variation (CV): expresses how tuch dispersion exists lative vo mean ofa dstbution: allows for diect comparison of dispersion across diferent dara yt, CV is calculated by dividing standard deviation ofa dsttburion by the mean or expected value ofthe distribution ow. x Sharpe Ratio Shope rai: messiges exces ear per unit of esky Shape rom Roy’ afeyfine rat, For both ratios larger is beer. Expected Return/Standand Deviation Expected return: E(X)=S>P(x;) x, E(X)= Psi) +P(%a)ea tet PO) eo Probable ara (x)= Eras E00 = Pn) ECO +P (aa) —1 Plz, BOP Standard devin: ke guste 00 of atanc. ii ars Correia: evince divided byproduct ofthe ovo standard deviations, ‘cov(ai.R)) “olRle(R) spect eur, srl of 20k por E(R,) = waE(Ra) +waE(Ra) EOP tt cotr(R 8) = who’ (Ra) + wae" (Ra) +2wawae(Ra)o(Ra)e(Ra Rs) ‘Normal Distributions [Normal dzribucion is completely described by its mean and variance {68% of observation ill within + to. ‘9036 fll within + 1.650, 9586 fall within + 1.960, ‘99% fall within 2.580. ‘Computing Z-Scores Zszore: “standardizes observation fom normal =: s a Binomial Models Binomial dieribaion: assumes a variable can take fone ofewo values (uccesflure) on the ease ofa stock, movements (up/down). A binomial model can describe changes inthe value ofan ase or porllis Jccan be usd to compute its expected value over several periods. Sampling Distribution Sampling distribution: probability dxtbution of all posible sample statisti computed from a set of squalsize samples randomly deawn from the same population. The sampling diribusion ofthe mean is the dseributon of estimates ofthe mean, Central Limi Theorem Central limi beorem: when selecting simple random -ssmples of sien fom population with mean i and finite variance othe sampling distbution of sample mean approaches normal prbabilry Aisbation with mean and vaiance equal 962 2s the sarple sae becomes large. ‘Standard Error ‘Standard er ofthe sample mean ithe standard deviation of ciseibution ofthe sample mesne. known population variance: =F unknown population vziance: $: QUANTITATE METHODS continued Confidence Intervals Confidence interoa: ives ange of aus the mean ‘alu wil be berween, with a given probabil ay 90% o: 95%). With known variance, Formula for a ‘confidence interval is itn 24,8 1.645 for 9096 confidence intervals (ignificance level 10%, 59% in exch ll = 1.960 for 95% confidence intervals (Gigaiicance level 52, 259% in each al) tq 2.575 for 9% confidence intervals (Ggniicance level 196, 0.59% in ech al) [Null and Aleernative Hypotheses ‘Null pothesis (4): yporesis the rescarcher wants to eject the hypothesis tha ie acrually rented; the basis for selection ofthe test statistics. Alerative Iypotbss (Hi): concluded if thee is sufciene ‘evidence to reject the null hypothesis Difference Between One and Two-Tailed Tests One-ailed te: ets whether vali ie greater than or lees han a given number. Tun-tald ee test whether value is equal toa given number. eg, Onetalled tes Hic 4 <0 versus Hy > 0 eg Tvo-aled tes: Ho: =O versus HH» 0 ‘Type Land Type Il Errors Tipe ero isection of null hypothesis when ite actually tue. + Tipe IT eror: flute wo ejece ull hypothesis when itis actually fale. ‘Asramprons of Technical Analysis : Samad ermine values (sie) + Salona eel + Security prices move in tends that persis for long petiods of time. Pacey ey Elasticity of Demand Pe lnc hy of dcemena = a rer “6 price Ifabiolte vale > 1, demand is elas absolute value <1, demand i inelastic: if absolue value= 1, ‘demand is unit clati. Price lsc has rw min determinants: + Available of subse, + Share of dg spent on produc. ‘lacy of demand and soppy is restr in the long ren Ona saaighline demand curve, demand is more clastic a high prices/low quantities, and ls asi slow picehigh quantities 1 atic range pric inccse wll decree total + Indice range price increase wil Increase rot Latge numberof independent fms. ‘+ Each frm produces a diferensaed produc. + Lowbariets 0 eney. * Demand is highly elastic, ‘Monopoly sa matket where one ira sls 2wel- defined product shat has no good substitutes and high entry barriers. Oligopoly ia similar struct ‘but har a small numberof fms ‘Any frm will maximize profits by expanding ourput until marginal revenue = marginal cost. ‘Marginal Revenue Product {fa frm uses an additonal uni ofan input, inease ‘in ouput is marginal producr (MP) of lst unit. ‘of esoure employed. Incest in revenue fom ‘producing/elling marginal produces the marginal ‘rvenue predact (MRP). Profit maximizing Gems wll increase use of ech resource uni] MRP = price of the resource. ‘Accounting Cost va. Economic Costs “Accounting onli Bm explo economic ounce bath explicit con opporeity costof equity capital Shore re lng ri shore ran, of plane! sguipment cannot be changed. In dong a al resources (co) are variable. Law of diminishing rerum more ress ae devoted to production proces, hey increase output buat crer-dezessing rte. ‘Competitive Models Price seberaceps market pier sel product. Price meee} | + Bach eller is smal relative tothe market; + While causes of supply/demand changes are hard to determine, we can see the acl sis in ‘supply/demand in market price behavior Four categories of trading rules and indicators: ‘Contrarian. Thinks majority is wrong, 20 doce ‘opposite of what most investor redoing, + Smart money. Thinks smart investors know bey, so wants o "jump on te bandwagon.” ‘+ Momentum indicator: Used to make decisions based on diection of marker price. and volume-based indieators, * Decrease in price of productive input that sa complement ro labor ‘The supply of labor i infuenced by: + Substation effec: incteaze in wage rate causer worker to substitute labor hours for leisure hours + Income effec increases in income increase worker’ demand fr leisure Schools of Macroeconomic Thought * Clasica: shifts in AD ani AS deven by technology changes: money wages adjust capily Inflation Inflaion rate: race of change in Consumer Price Index over given period of ime’ + Frictional: economic changes prevent matching (qualifed workers with job openings. + Siactual unemployed workers do aoc have the skills o match newly created jobs + Gelcalrcesion phase of busines je, ‘economy producing ales than capaci Labor Demand and Supply [Atm demand for labor increased by: + Increase in price ofthe fem’ ourput. > Increate in price ofa productive npuc thats a substitute fr labor. to restore equilib. + Keynesian: shifts in AD caused by changes in expectations wages are “downward sticky", use fiscal and monetary policy to increase AD snd estore equilibrium, ‘+ Monearist: monetary policy isthe main factor Jeading o busines cycles cental bank should ineeate money supply at predictable rte, ‘Timing of Fiscal Policy Time Lae (2) Recognition (2) Administrative (3) Impact Automate nabiicers (0) Induced axes 2) Needstested spending. Monetary Policy 1 epost expansion mukipier = Reserve Requirement Fed contrals money supply thece ways + Reserve requtemens, + Open matker operations —mort used. + Discount rte Recognition “Tyo requirement: (1) completion of earings proc and @) resonate of rym Extraordinary ems (US. GAAP ony) ‘Similar co unusualinftequen ems, except ‘extraordinary items are deh unusual and infequent in occurence, and material in nature (goss fiom expropriation of acu). IFRS docs no alow xsi temo be epanted om oping Discontinued Operations “Tobe accounted fr aa dicontinued operation 2 brsines-—asen, operons, investing financing actives mus be ly sine fem ex offen Inlet reported ero. after net income fom continuing operations. ‘Compute Cash Flows From Operations (CFO) Direc mebod: art with cash collections (ch equivalent of sale); ash inputs (cash equivalent of cost of goods sold); cash operating expenses: cash Inceres expense cah axes Indirect method stare wth et income, ssbeactng, buck guns and adding bec loses resling fom Free Cash How es eee dicronary purposes equal oping ch FINANCIAL REPORTINGAND AALS continued. (Critical Ratios Common ize financial eatoment analy: + Common-size balance shee express al balance sheet accounts 36a percentage of toral aes. + Commons income atemenc express all Jncome statement item 36a percentage of eles. + Common size cach fw statement expresses ‘each line item asa percentage of total cash Inflows (outflows), or aa pereenrage of net Horizontal common ize financial natemene analy ‘expreszes each line item eave rie valu in 3 ‘common bae period. Liguidiy rates ‘arent aio~ ren labiliies cash marenble wrest recibles ~ ee abe cath marerabe secures caren abies cao mk. es tciables eee Receivables, inventory, payables turnover, and day’ ‘agp eon of whch ar wed nthe cab comin ee quick ro cath ratio defensive interval = netannvsl sles seccblestunove = See p e cost of goods sold et none erage inventory pyables turnover aio ALO dys of inventory on hand ‘inventory mmover numberof days of payable a stooge [EY onhand _g faye ofeals)_ (number of days fouttanding) | of payabler Tal ae, fsed-aser, and working capital rurnover alee uno nae fixed asset urnover-= ——=0e —_ Ere Srerage net fxed act ‘ange working apie Gres, operating, and ner profit margins gros profie margin. working capil turnover: ‘net profit margin = evar om aes resus om total capital (ROTO) recumonaxex___EBIT (onl capital) ~ Gverage otal capital payables turnover ato ‘Debt equ ratio and ital debe rato: toral debe debe to-equity ratio = SEE oe ‘oral equity weenie Interest coverage and fed charge coverage EBIT inter coreage = SEL Se poymens Le Growth rate (@: g= RR x ROE dividends declaced ‘peatng income after exes Liguidiy ratios indicate companys ability 0 pay ss ‘shorter liabilities. (Operating performance ratios indicate how well management operate the busines, Datta mn) veoenei fl a Extended DuPont equation further decomposes net profit margin: (ez income ‘You may alo seit presented as [ROE = tax burden inter burden [EBIT margin x ase turnover x leverage Inventory Accounting In periods of rising price and sable o incressing inventory quantities: LIPO resin FIFO rests in: Higher COGS ‘Lower COGS, Laver exer Higher exe Lower netincome Higher net income (Br aEAr) @BrackAr) Lower inventory Higher inventory balinoxs balan Lower working capital Higher working capil Higher sh flows Lower ash flows (Grae paid ou) (Taxes paid our) Basic and Diluted EPS Bate BPS callin does not conser ec of beeen eee ees 2 EPS ‘ved ave to. oF comaton the curmanding Bee ——— peer ee Se reas a7 eh es = ae eee ee) nde see a aoc et Long Lived Assets (Capitalizing vs. Expensing Ceptalicing lowers income vasiabilry and incresees near-term profits Increase TA, equity. Expenting opposite eect. Depreciation Asming continued invent in new ave cltive to ‘firm that uses accelerated deprecation, a company ‘that urs straight-line deprecation wil have: “+ Lover: deprecation expense, rurnover ais. * Higher: et income, aes, equity ROA, ROE + Same cashflows. + Recognized wen the carrying value ofan aset ishigher than the am ofthe Ruare cash Rows {undiscounted) from ther use and disposi “This makes impsiements subject to management manipalaton, + Loss measured asthe carying value ofthe aset ‘mus te ur vale of thease 1+ Bnancial atemensimpacr: wtedown will ‘immediately cause income, asset value, defered ‘tases, and equity to desin,Iewill aur ature depreciation to decline, and as 2 result, farure net income wil ite. Ast turnover ratios will increas after writedown for impalement. Deferred Taxes ‘+ Created when tzable income (on tae rewen) # pretax income (on financial statements) due to temporary diferences. + Deferred taxable are created when taxable “income < pretax income, Treat DTL at equity fot expected to revere arta. et taxable income en. not Long-Teom Liabilities *+ Premium bond: coupon rate > market rte at * Discount bond: coupon rate « matkec ate at + Insert expense equals book value a the beginning ofthe year muliplid bythe matket rite of intrest ache dime the bonds were sued, + Anabstc cach flow perpetve: for prem bonds (CEP is overetated and CFO ie uncertate relative ta par bonds. Leases Financial atementrasio impact fleas accounting ‘rom thelesee peepective: capital eases rele in + Higher: assets, abilities, CFO, debelequvy. + Lower net income (early yeas), CFF, curent ratio, ‘working capital, ast turnover, ROA, ROE, + Same: trl cash Bow. Marketable Security Classifications Belence Income Sheet Sietement Hddforvading ‘Favnlve Dividends Inert Rested GL Unreind GL Avaibleorik Fis wive ‘Didnt ie Reale GL Hebsmasricy Amoted cos. cers. Rese GI. Tntercorporate Investments << 20% etmersbip: no sigifican influence; wse accounting methods for passive investments. 2086 r 50% ownersbip:sigican influence use ‘equity method. Jin como: proportionate consolidation permitted ‘under IFRS oaly, equiry method usually required under US. GAAP. > 50% ounersip: contol ofthe invester se consolidation method. Rae Weighted Average Cost of Capital WACC = (w,)Dks (= D1 + rg kg) +) ,) (Cot of stained earnings using CAPM: RER + (Ryy,~ RFR) Cost of Preferred Stock cH, CR cE NIV=ch @ ay oe {RR discount rate hac makes NPV equal wo 0. Pro Forma Financial Statements 1. Bsuimate the ations Berwisn alsa and changes i income Statement and balance sheet rem 2. BsimateFarure tax ate, interest ates on debe, lease payments, ex: 3. Forest sales 4, Estimate xed operating and financial cows 5 Integrate thes etmates into proforma nancial tatement, Pure-Play Method Project Beta Delevered ast beta for comparable company: 1 a Speer s(t-3 ‘Working Capital Management Primary soueesof iui. cash balances, shore-erm funding, cath How management of cxlleeons and payment. Secondery sources of hguiiyiguidating assets, negotiating debt agreements, banksupeey prowction Bane Pet ® Cost of trade cei (77296 discount 6 discoun faa Corporate Governance Favor shrcbalder interes independent board, ‘trong code of ethic, confidential voting. “Harm tarchlder interes: management aligned board, voting esvietions, takeover defenses, ee ‘The SML and Equilibrium an Investment Policy Statement Investment objcives: + Retum objectives, + Risk tolerance Comer Liquidity neds + Time horizon + Tax concerns + Legal and regulatory factors + Unique needs and preferences ‘Combining Preferences with the Optimal Set ‘of Portfolios “Markowieefcient Fontes che set of portflios thar have highest return for given level of ick. en) Security Market Line (SML) eee cee ee eer eleees mittee preemie! var mvs ar competed et Str i “Tre ion ofthe SMI isthe CAPMewbich 2 reutnnematic sk equim reasons. V2 eee em) Copia Maret Line Frater vette ar CAPM: £(R,) = RER + 6,[E(R aig) RER] ) Seay Marker Lie or) mmm Sie RCo) ening mized ck Consider tree stocks (A, B, ©) and SML. Estimated stock returns should plot on SML- + Areuun plot over the line ie sndepce. ‘+ Aretur plo under the line i cverprced a) RFR Pris TCT Tay NT YTS TS ‘Well Functioning Security Marks esa Liu eal eee ee ee cos). coe ee eee ee ey Margin Purchases 4 Ferme nace = ee FOr. ‘Levered return = HPR > leverage factor. “Margin Call Tigger rice Tatil wun 99) eer ‘Computing Index Prices vied de tok ee Valueweighted Index Eleurene pce @sher) ae Sase year price) (#base year haves) Price Indexes and Bias * Price-weghted: average of prices of index stocks, visor adjusted for epi, biased downward due to splits of good performers, 1+ Vlue-weighted: base period value increased bby percentage increat in total market value cof index firms’ stock, large-cap stocks have lisproportionatly large influence + Bjualoeghted either arithmetic or geomettc. mean of individual index stock returns, geomentic mean has downward bis Behavioral Finance 1+ Prospect theory iwestors view outcomes based on ‘where the le relative ro a reference point such as. ini weal + Fear of loses investors tend to sll winners to soon and hold losers too long due ro fear of os and avoidance of realizing alse. + Confirmation bia investors tend to overwcight ‘confirming evidence and underweight concrary evidence + Ecalation bias investor 100 often incresee the sine ofa postion tha has declined in value Ly (One Pei Valuation Model Due R y, Ok) OF) Beste rouse expected dividend D, in calculation. Infinite Period Dividend Discount Models Supernormal growth model (wuti-sage) DDM: Daye n (+k) +k)? Contes gett etl yon Dulte) DL eee k ar Cita elatonship berween ang: CCiccal aumprion of infinite petiod DDM: + Stock pays dividends constanc growth ae ‘+ Constant grow ste, g, never changes + A. must be greater than (or math will not wor). Forms of EMH + Weak form Curent stock prices fly reflect available security marker nf. Volume information! ast price do not relate wo future dizetion of Security prices. Investor cannot achieve excess ‘eu using tech analysts, Semistrng form. Secutey prices instantly adjust tonew public informaron. Investor cannot achieve excess Feturns using Fundamental analysis. 1 Sirong form. Stock prices fly reflect all nformation fom public and private source. Asunerperfit ‘markers in which all information i cor free and Earnings Multiplier Model D, By _ payout ratio Ekg kg Price Multiples ce per share cast the EPS next 12 mo leading PIE = aerate ES previous 12 mo. price per share yey een iBook value per share vis ~ rie pet share Basic Features of Bond Structures + Indenture Agreement containing the terms under “which money is borrowed. + Tor to maturity Length of ie unl loon contrat ot agreement expire, Par value Amount borrower promises pay or before menu date of the ie, Coupon rate. When mulkpied by pa value, gives amount of inzrest to be pad pet period Zere-coupon bond No-interes bonds; are tld at deep discount from ther par values. ‘Repayment/Prepayment Provisions ‘+ Baller bonds Lump sum at maturity pays entire principal. *+ Serial bond. Pay of principal through series of ‘payments over sie. “Amorizng securities. Pesiodic principal and inert payments ‘Sinking find provision Provide for bond retirement through predefined principal payments ‘overlie ofthe itu, + Call provisions, lesuer bas right (but not obligation) zo ree al or par of sue prior 0 ‘maturity, Isace owns option to cll the bonde amy from investor. ‘Refandng provtion, Nontefundable bonds prohibit premature retirement of an se from proceeds of lower coupon bond. Bonds that ‘any these provisions can be fel callable but nonrefundable Basics of Floating Rate Bonds + These scutes pay variable rate of ieee. ‘+ Common procedute for setting coupon rates on floating: cae bonds starts with reference rates then aaldlsuberace a sated margin Interest Rate Risk ‘Key point there is an inven relationship bericen interetrates and bond pics How bonds features affect interest rate risk + Longet maturity bonds, lgher interest ae rs {allele same). Smaller coupon bonds, lgher interest rate che same). + Tf markerinerst rates ae high, price volatility will be lower than if marke incre rates are low. Floating eae securities have very lw level of price {ola th relation co Interest rate Ebi. coupon rate > cequired marke yield > bond price > parvaluc premium band Wf eoupon rate «required market yield = bond price «par value: dicount bond coupon rate = required market yield = bond price» pa value: par bond Reinvestment Risk ineere ates decline, investors are forced to reinvest ax lower yields. Bonds with high coupons have greater sak. Greatest tik swith ellabl bonds, wher all pare of principal «an be repaid in low interes ate environment Credit Risk 1 Dfels sk Isucr might not make payments + Gre spread rir. Difference in bonds yield from yield on rs-fiee security. All else equal, che skier the bond, the higher che spread + Downgrade risk Bond may be reclassified as skier secuiy bya majo rating agency. Basic Bond Pricing Teale a emi-anraat py bond using» financial caleultor (all FV = pur, purr = S06Pon (# yearsx2), VY “There are se equivalent ways to price a bond + Discount at constant rate applied to all cath lowe (YTM) to find ll faut cash flows PY. teat each cash low a single zero-coupon bond and find PV of each “ser wing appropriate spot rate foreach cashflow Prices mus beth seme vo preven arbitrage aie aa i pcre pees eee Soe SS tet etd Co rie ‘Bond price without accrued inert is lean price. Full price inludesscerued interes. Fal price» clean price + accrued interest Yield Calculations annual coupoapayment Turret yield ike ‘Annual Equivalent Yield, (Converting a bond-equivalent yield (BEY) to an ‘uivalene anual yield (EAY) or vce ves: 'BEY of an annual pay bond [04 YT Massage)" 11 Ee peer case yi (14 25 Spot Rates “To derive bond’ value using spor sates, Aliscount the individual eth flows 2 appropriate rate for each lw’ time horizon: sum PV of che eth Hows ro gee bond’ current ‘ale. This value i she abieagetree vale. Duration and Convexity + Duaation she slope ofa bond’ pice-yeld function. Iie steeper at low interes rte, fatter a high intercrater, So, duration (Gncerest rate sensicviry) is igh alow rates and low at higher rate This hold for non- callable bonds. ane isa measure of degree of eurvarure ‘or convent in the pricelyed relationship. Converty accounts for amount of erorin ‘extimated price (bated on duration). ‘A.callable bond is key o be called as yields fll sono one will pay a price higher than the cal rice. The price wort ee significanly ax eld fills and youl see negative convexity at ‘work —as yields fal, prices reat a decreasing rate For positively convex bond, as yields fal, prices ear an increasing rate. DEBT INVESTMENTS coma effective duration (D) = 2v(ay) | Convexty measures curvature ofthe pric-yeld Function Note: Ay isin decimal form. [Term Structure Theories | Expezarionshypohert. Yield carve shape elects investor expectations about future behavior of | shor-term interest xe, Forwad tes compared ‘sng today spor rates are Best gs frre + Liquaypreirence ory veo prefer eter liquid wil demand premium (higher yids dove in longer-term ise). + Marke egmeneation theory Macket fr debe secre i sgmented on bate of investor rmaury preferences. Each einen interes fe level is determined by supply/demand "Fonvordconac one ary agrees f0 buy (ounterparey sel) apis at spec price on speci few date. Iasset’s fare pie incest, bye (tthe ode lower price) has a gun and ler has os. + Faure contrac. Sandarized, changed forward conwat. Diferene fom frac in dha fares wade in ae secondary mathe, re ‘equled, backed by ceringhoue and require aly cement of uinalowss Arbitrage + Law fame price «wo ws with denial cash sin che fue, regalo uur evens, should have the sme price IFA and B have dencical future pays, and Ais priced lower than B, buy A ad lB + Second ope of arbre two ase with uncertain havea tar certain f theme Forward Contracts + Tong must pay a etain amount at specie fat date o shot, who wil dlver the sundesying ast. + cash serlement forward contact docs not require acral delivery ofthe undying ae, but cath payment tothe party disadvantaged by the dference between markt price ofthe atset and contac pice at setlemens date. + Esl termination can be achieved by entering into nee forward conta with the opposite potion, tthe then-current expected Future Price. Ths wll x the amoune of payment tobe rmade/ecivedateetdemene dat Forward Rate Agreements (FRA) Can be viewed a3 formar contac to boro! lend money at cen ate ae some Faure dae Fonmula for payment to the long tsetdemen ating rate= rae) 2] bees, pence) 1+ aig to 22) FFacurs vs. Forwards Forwards Faves Private conacte —_Exchange-taded Unique contacts Standardied contact Default risk Gaal Lle oro regulation Regulated atures vs. Forwards ee “American vs. European Options American opsions ec the owner exercise the option any time before o at expiration. European options can be exercised onl at expiration. Value ofthe American option will equal/exceed value ofthe uropean option, Lower and Upper Bounds for Options Onin | Minima ae | MES seer | Sees Rea al. |“? ps = s ie all 5 (Notes = na epiaton Put-Call Parity Puceal patty holds that poreolios with identical payoffs mu sl forthe same price to prevent atbtrage, The put-cll parity selationship: CH +P (UFRRRY ‘Bach seculty in the pura patty relationship ean be expressed a: x Hy (Cray x (Ry Buyer of all option—long position. ‘Writer (eller) ofa call option—shor: poston Buyer ofa puc option —long positon, ‘Whiter (eller) ofa pur option—shore position. Ininse value of al option = Mar{0, $~X} Intrinsic value ofa put option = Max[0, XS] pect US.$49,00 © 2009 Kaplan Inc. All Rights Reserved. so014s ‘Traded Funds (ETFs Special pe of find that invest ina porto of ‘Rocks of bonds; designed o mimic performance of Serle ‘Advantages of ETFs + Bficint method of dvesieation Trade similar o traditional equity invemens. + Sonse Ts patterned ae nex ath active forareoption marker; bee se management + ase coenpeidon i non all tie + Type very cient operating expense tos; 10 loads to purchase o redeem bars, + Decieased epi gainer sbi. Disudrantages of ETFs + Some counties have ewer indexes than the US. for ETP to ack (els in mid- or low-ap stocks not being wel represetet). + Alico trade ateaday may noe be ignificane eee eee eee «ETFs with low wading volume may bave lange pe + Lager investors may choose to dicey invest in Stet ate reer ered ‘Valuation of Real Estate Investments Vata relent ot met el compatton method, and income method + Tnootne method wet «discounted cash ow todel ilar to dt for a perpesiy: Not os + Neb operating income (NOD esa rss ‘opcrting income le ctimated vacancy, collections, and other operating expen cluding propery tne, bu exlading income tase), NOI dos not incl depreciation ot eraees Hedge Funds—Risks + Mid + Potential for misrcing lavestmens in ese infrequently traded secures may edo eee eee © Crererpersy crt ah +. Seloment ero Rik of counrepay falar to diver security as agreed on seement doy. + Shr coring, Rik har manager short ere erate teeta cent ciate epee ee ere ene + Margin call, Cara in forced sling of sss, postibly a alos, 0 a already highly levee potion Investing in Commodities Conteng ature pie > spo prc. Bectwardavon fasts price

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