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LAST MINUTE REVISION


[LMR]
Compilation of CA Final SFM Formulae by SFM Praveen
CA Final SFM Chennai Batch
Portfolio Management Schedule : 10-Jul-14 to 04-Aug-2014
Timings : 3:00 pm to 8:30 pm
Return of Stock [P1-P0]+D1 ×100 Venue: Premier Academy
P0 Mylapore, Chennai

If Probabilities are If probabilities are


Given not Given
∑ × CA Final SFM Batch I
Schedule: 12-May-14 to 09-Jul-14
Expected Return ( x )
Timings: 6.15 am to 9.30 am
Venue: HBA College,Himayat
x x Nagar,Hyd.
Standard Dev. (σ)

∑ P( x ( y x y
Co Variance (x,y)
Correlation(x,y) =

Portfolio Risk
2 Securities:

3 Securities:

x y For important problems,


Beta of the Stock β= (or) (or)
Download from:
y
www.sfmpraveen.com
Expected Return of the stock or Mail
praveen_302917@yahoo.co.in
CAPM Return Rs=Rf+β(Rm-Rf)

Free One day last minute Revision Class of SFM for May 2014 Exam will be held at
HBA, Himayat Nagar, Hyderabad on 11th may 2014 from 7:00 Am to 7:00PM.
All Final Students are welcome

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Capital Market Line = +


Expected Return using:
Security Market Line =

Characteristic Line =
Single Factor Model/Sharpe Return Risk
Index Model
Stock
Portfolio

Exponential Moving Average(EMA) = EMA of Previous Day + Smoothing Factor [ Sensex Current close-Previous EMA]

Multifactor Model/Arbitrage Pricing Theory


Expected Return =

Theory of Constant Mix Portfolio fixed weight will be given for equity value of the investment and Rf Value and
portfolio will be rebalanced at regular intervals to bring it back to the desired level.

Theory of portfolio proportional insurance Amount for Equity = m (Portfolio value – floor value)
m= 1/ Maximum Change in stock price.

Minimum Risk Portfolio Cut-off Point =

Portfolio Return Weighted


Average of Returns with
= 1-
Amount of Investments as
Our Faculty Team for CA final
weights.
PF Return = ∑ Weight X Return SFM SFM Praveen
Auditing CA.Vikas Oswal
AMA(Costing & QT) CA.Hariharan &
Portfolio = weighted average of of the P.R.Vittal
stocks in PF DT CA Ramchandra Rao
Reduce PF : IDT CA Ramchandra Rao
Amount of to buy = (old β – New β) Value of PF ISCA BVN Rajeswar
New β FR Shanmuganadhan
Increase PF :- LAW Ramakrishna Sastry
Amount of to borrow = New -old Value of PF Visit sfmpraveen.com for class schedules and online
New
registrations

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CA Final SFM Batch III


Mutual funds Schedule : 05-08-14 to 25-09-14
Timings : 6.15 pm to 9.30 pm
Return of mutual Fund = X 100
Venue: HBA College,Himayat
Nagar,Hyd.
NAV of a Scheme =

Required return from Mutual Funds =

Fund Valuation Ratios Our Faculty Team for CA IPCC


Sharpe Ratio
Accounts I Shanmuganadhan
Auditing CA.Vikas Oswal
Treynor Ratio
Costing CA.Hariharan
Taxation CA Ramchandra Rao
Jenson: Accounts II Shanmuganadhan
Fama: LAW Ramakrishna Sastry
IT & SM BVN Rajeswar
Morning Star Model: Average Return – Average Risk of
Visit sfmpraveen.com for class schedules and
loss in MF compared to Rf
online registrations

Equity Derivatives
Call option Put Options Put-Call Parity Theorem: Theoretical value of
S0>E.P - In the Money S0>E.P - Out of the Money For Put = P.V of E.P + Call Premium – S0
S0=E.P - At the Money S0=E.P - At the Money For Call = S0 + Put Prem. – P.V of E.P
S0<E.P - Out of the Money S0<E.P - In the Money S0 = P.V of RF + Call Premium – Put Prem.

Call Holder/Call Writer Put Holder/Put Writer


E.P E.P

S1>E.P S1<E.P S1<E.P S1>E.P


Exercise Lapse Exercise Lapse

Position View Profit Loss Option Underlying Position


Call Holder Bullish Unlimited Limited Buy Buy Option to Buy
Call Writer Bearish Limited Unlimited Sell Sell Obligation to Sell
Put Holder Bearish Unlimited Limited Buy Sell Option to sell
Put Writer Bullish Limited Unlimited Sell Buy Obligation to Buy

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Call Premium Put Premium

Intrinsic Value Time Value Intrinsic Value Time Value


Premium-I.V Premium-I.V

ITM ATM/OTM ITM ATM/OTM


So-E.P Zero E.p- So Zero
Derivative Strategies
Spread View on Stock/ Nifty Position in Options
Bull Spread with Calls Bullish Buy E1 call
Sell E2 call
Bull Spread with Puts Bullish Buy E1 Put
Sell E2 Put
Bear Spread with Calls Bearish Sell E1 call
Buy E2 call
Bear Spread with Puts Bearish Sell E1 Put
Buy E2 Put
Butterfly with calls Buy E1 call
High volatility Sell 2X E2 calls
Buy E3 call
Butterfly with calls Sell E1 call
Low Volatility Buy 2X E2 calls
Sell E3 call
Butterfly with Puts Buy E1 put
High volatility Sell 2X E2 Puts
Buy E3 Put
Butterfly with Puts Sell E1 put
Low Volatility Buy 2X E2 Puts
Sell E3 Put
Long straddle High volatility Buy call, Buy Put
Short straddle Low Volatility Sell call, Sell Put
Long strangle High volatility Buy E1 call
Buy E2 put
Short strangle Low Volatility Sell E1 call
Sell E2 put
Strip More downside likely Buy 2 puts and 1 call
Strap More upside likely Buy 2 calls and 1 put
BOX Any movement Bull spread + bear spread

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Options Valuation Models

Stock Equivalent Option Equivalent Approach:


Approach Black-Scholes Model:
Call Premium = No. of shares to
buy × S0 – P.V of Bank Loan D1 =

No. of shares =

Options closing in Options Closing Risk Neutral Model:


ITM: OTM:
Call prem.= Call GPO @ higher end ×Prob.(up) + Call GPO @ lower end × Prob.(down)
S0= P.V of Rf + Call S0=no. of calls × 1+
Premium Call Prem + P.V of
Lower stock price

If dividend Amount is given,


No. of calls to buy =
Revised = - P.V of Dividend receivable
If dividend Yield % is given,
Revised = - % Div. Yield

Futures Valuations
CA Final SFM Batch III
1. Schedule : 05-Aug-14 to 25-sep-14
Timings : 6.15 am to 9.30 am
2. Venue: Ameerpet,Hyd

3. Non dividend paying stock: Theoretical future price = So ×

4. Dividend paying stock , D = P.V of dividend

5. Dividend Yielding stock TFP = , y= Dividend yield

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6. Long on Portfolio
No of Lots of Nifty to Short =
For full hedge
Long Portfolio

Decrease Increase
No. of Nifty Future No. of Nifty Future lots
Lots to sell = (Old - New )X Value of PF to buy = (New - Old )XValue of PF
Lot Size X Nifty Fut Price Lot Size X Nifty Fut Price

Mark to Market Initial Margin = x + 3


Maintenance Margin = 75% of Initial Margin

Commodity Derivatives

Theoretical Forward price = , I = P.V of Inventory cost.

Convenience yield refers to Benefit holder of commodity receives if he held the stock in physical form rather
Than Future position
Present Value of Convenience yield = S0+ P.V. of Inventory cost – P.V of Future price

Bond Market
Value of Bond = P.V of future cash flows of bond (i.e. Coupon Rate & Redemption Value)
Current Yield = Current yield refers to the return investor gets in the current year
= Interest P.A
Current Market Price

Yield to Call Yield to call refers to return investor receives if he surrenders the bond when called back by the
company.

YTC = X 100

Yield to Maturity Yield to Maturity refers to return investor receives if he holds the bond till Maturity.

Yield to Maturity = X 100

Duration of the Bond It refers to weighted average maturity of the cash flows of the bond.

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Volatility of the Bond It refers to Sensitivity of the bond to Interest rates. In other words, Volatility shows
%Increase or % decrease in Bond price due to decrease or increase in interest rates in the economy.

Volatility% =

Portfolio Duration It refers to weighted average of duration’s of the bonds in the portfolio.

Straight Value of Bond Straight value of Bond means the Present value of Plain Vanilla Bond (Non-Convertible Bond)

Conversion Parity Price It means the value of Equity share at which it makes no difference for investor whether
converted or not.

Floor value of Bond It is the value of the convertible Bond, if the stock price falls drastically to even to zero.

Downside Risk = X 100 Conversion Parity Price = X 100

Fixed Income Derivatives


Interest Rate swap-
If Fixed Diff > Float Diff
Conversion from Fixed to Float is Possible from the angle of stronger company.
Strong Company Weak Company
1. Pay Fixed to Bank 1.Pay Float to Bank
2. Receive above + share of Swap 2.Pay Step 2 to Strong Company
3. Pay Float (Which is otherwise 3.Receive Step 3 from strong company
payable to Bank)
4. Net Cost = 1+2+3 (Float) 4.Net cost = 1+2+3 (Fixed)

If Fixed Diff< Float Diff


Conversion from Fixed to Float is possible from the angle of weaker company
Strong Company Weak Company
1. Pay Float to Bank 1.Pay Fixed to Bank
2. Receive above + share of Swap 2.Pay Step 2 to Strong Company
3. Pay Fixed (Which is otherwise 3.Receive Step 3 from strong company
payable to Bank)
4. Net Cost = 1+2+3 (Fixed) 4.Net cost = 1+2+3 (Float)
Forward Rate agreement is an agreement to borrow and lend money for specified period in future but rate of Interest is
fixed now
Borrower Angle Lender Angle

Actual Interest > FRA Actual Interest < FRA Actual Int > FRA Actual Int < FRA
Diff Gain Diff Loss Diff Loss Diff Gain

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Theoretical Forward Rate Theoretical forward rate refers to the FRA at which there is no Arbitrage Opportunity
available by borrowing and lending for different maturities. For example,
(1+1st Year Rate) = (1+6 Months Rate)(1+2nd 6m Rate)
(1+6m Rate) = (1+3m Rate) (1+2nd 3m Rate)
(1+2 Year Rate) = (1+1st Year Rate)(1+2nd Year Rate)
2

If the above equations are not satisfied, Arbitrage Opportunity available

Relationship between Interest Rates, Reinvestment income & Bond Prices

Interest Rates Re Investment Income Bond Prices

Immunization refers to buying a bond in such a way when interest rates rises fall in the bond prices will be exactly
compensated with rise in Reinvestment income and when interest rates falls fall in the reinvestment will be exactly
compensated with raise in the bond value. Immunization can be achieved by buying the bond now and holding it till
duration.
Corporate Dividend Policy

Walter’s Model:
Dividend Discounting/Growth Model P0 = or (No growth)

Gordan Model:
P0 = or
G= Retention Ratio X IRR
Retention Ratio = 1 – Payout ratio.
Earnings Growth Model P0 =

Modiglani Miller Theory Dividend decision is irrelevant in determining the value of shares. In other words, whether the
company pays the dividend or not the stock price will not change.

I1= Investment in Year 1, E1= Earnings in year 1

m= Old No. of Shares, n= New No. of shares

Theoretical post Rights Price = (SoxM)+ Rights Proceeds Post Bonus Theoretical Price = SoxM
M+N M+N

Post Split Price = SoxNo. of Shares


New no. of Shares

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Mergers and Acquisitions


Earnings Based Valuations method

No. of shares issuable =

Market Based Valuations method

No. of Shares issuable =

Book value based valuation method

No. of shares issuable =

Discounted Cash flows method The future cash flows of the target co. business will be estimated and discounted with
acquiring co.’s cost of capital.

Weighted Average Method Weighted Average of 2 or more of the above Methods.

FOREX Markets
When bank buys denominator
currency Bid Rate.
When bank sells denominator
Bid and Ask Value
currency Ask Rate

and =>
Fx Rates of Few Currencies
Cross Currency Bid/Ask Rs/$ - 60

and Rs/€ - 85

Rs/£ - 100
Conversions from
¥/$ - 103
Denominator to Numerator = Multiplication.
Numerator to Denominator = Division. Rs/AED - 16

Price & Product Price is Numerator & Product is Denominator

(if +ve Price is Premium, If –ve Price is Discount)

(if +ve Product is Premium, If –ve Product is Discount)

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SWAP Points

Ascending Order – Add SWAP From Spot Rate to find Forward rates.
Descending Order – Deduct SWAP

Interest Rate Parity Theorem

According to Interest rate Parity Theorem, Theoretical Forward Rate =

Rh= Home Currency Interest rate, Rf = Foreign Currency Interest Rate


If Actual Rh > Theoretical Rh = Borrow in Foreign Currency & Invest in Home Currency (i.eMoney is cheaper in
Foreign Currency).
As on 1/1/2014 As on 31/12/2014.
1. Borrow in F.C 5 Redeem Deposit + Interest.
2. Convert in H.C @ spot. 6 Reconvert to F.C @ Fwd Rate.
3. Deposit @ actual Rh 7 Repay F.C loan
4. Take Fwd Cover to buy F.C 8 6-7 Arbitrage gain

If Actual Rh < Theoretical Rh = Money is cheaper in Home Currency. Hence borrow in Home currency & Invest
in foreign currency.

As on 1/1/2014 As on 31/12/2014.
1. Borrow in H.C 5. Redeem Deposit + Interest.
2. Convert in F.C @ spot. 6. Reconvert to H.C @ Fwd Rate.
3. Deposit in F.C 7. Repay H.C loan + Interest.
4. Take Fwd Cover to sell F.C 8. 6-7 = Arbitrage gain.

According to Purchasing Power Parity Theorem/ Theoretical Forward Rate =

here I refers to Inflation.


Money Market Hedging

Money Market Hedging refers to simultaneous creation of FX asset for existing FX liability in case of importer and
creation of FX liability for existing FX asset in case of exporter.

Importer – Payment due.


1. Identify Fx Liability
2. Create Fx Asset (Deposit in foreign currency bank @ Deposit rate) by borrow in Rs. & Conversion to Dollar at spot
rate.
3. Redeem the deposit and repay the Liability
4. Repay home Currency Liability + Interest.
Exporter – Receivable
1. Identify Fx Asset
2. Create Fx Liability by borrow in Dollar on 1/1.
3. Convert to Rupees at 31/1.
4. Realize Fx Asset & repay Fx liability.

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Leading & Lagging


Leading means pay or receive now. Lagging means pay or receive later.
Importer (S0 – 60 Rs./Dollar, Credit period 1 year)

Expected S1 – 55 Expected Spot rate

Pay Later

Lag the Payment S1 – 70 S1 - 61

on 1/1 borrow Rupee Lag the payment


Convert Rs. Into Dollar @spot
Make the payment
On 31/12 – repay the loan+ int.

Lead the payment.

Int rate < Dollar Appreciation Int rate > Dollar App

Exporter (S0 – 60 Rs./Dollar, Credit period 1 year)

Expected S1 – 55 Expected Spot rate

Receive now

lead the Payment S1 – 70 S1 - 61

Lag the payment Lead the receipt

Int rate < Dollar Appreciation Int rate > Dollar App

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Risk analysis

Returns of the stock x = ∑ P X X

Risk of the project = ∑p(x- x ) 2

Risk Adjusted discount rate = Cost of Capital + Risk Premium


CA Final SFM Batch II
Schedule : 12-May-14 to 09-Jul-14
Certainty Equivalent Factor = Timings : 6.15 pm to 9.30 pm
Venue: Ameerpet,Hyd.
Sensitivity Analysis

% of Sensitivity = X 100

Sensitive’s CFAT

LIFE

O/F

D/F

Hillier’s Model

Independent Dependent
C/F S C/F S

Discount Variance of C/F S Discount S.D with


@ 1 1
(1+r)2n (1+r)

Then Sum of S.D is project S.D


= S.D of Project

x
Z Value = =

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Leasing + is inflow and – is outflow

Lessee (Financial Decision) Lessor (Invetment/Capital Budgeting Decision)

Initial Outflow (-)


Option I Option II Receive Lease Rent(+) & Pay Tax(-)
Claim tax on Depreciation(+)
Take the asset on Lease Borrow & Buy Realize terminal/Salvage Value(+)
If NPV +ve Lease is viable
 Pay lease Rent(-) Pay Interest(-) If NPV –ve Lease is not viable
 Claim Tax (+) Claim Tax(+)
Claim Depreciation (+)
Get Resale Value (+)
Repay Loan (-)

About our faculty Team

SFM Praveen

Mr.SFM Praveen is a CA having 6 years of experience in financial markets. He has worked as Equity research
analyst in Bombay stock Exchange, Mumbai. He was chief consultant for LIC, ICICI, Kotak, FIIs, banks and
Investment bankers on Equity markets, Derivatives markets & currency markets. He has contributed various
articles to “Economic times”.
During his 3 years of working in Dubai with Toyota Motors Corp, he used to manage treasury of USD 7 Bln
specialised in Hedging tools for foreign currency imports and exports dealt with 11 currencies. After getting rich
experience in financial markets in financial markets, he took teaching career out of passion to lead young
Chartered Accountants to financial services Industry.
He can be reached at info@sfmpraveen.com

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CA Mr. Hariharan is a practicing Chartered Accountant. He teaches Costing & Financial


Hariharan Management and Advanced Management Accounting at The Institute of Chartered
Accountants of India (ICAI), SIRC of ICAI – Chennai, Bangalore, Calicut, Ernakulam,
Mysore, Coimbatore, Palghat, Kumbakonam, Trivandrum, Tirupati, Erode, Pondicherry
& Alleppey and other reputed Institutions at Bangalore, Hyderabad, Cochin, Calicut,
Chennai,Coimbatore&Mumbai.

CA. Hariharan is a B.Com Gold Medalist and he has more than 10 Years of Experience
in Teaching CA Students. He is fondly known as Costing Guru by students. His 38 Hours
of continuous class for CA Final Students at ICAI Trivandrum branch stands evident for
his untiring commitment towards student fraternity.

Vikas Kumar Oswal

Vikas Kumar Oswal is a qualified Chartered Accountant & Company Secretary, he also
hold a Diploma in Information System Audit.
He has Conducted various study circles, meetings, presentation on various topics on
auditing, company law and other related areas at ICAI, ICSI, SICASA, KPCL, HAL,
Honeywell & Tyco Electronics. He has been teaching Auditing for CA Final & IPCC
students at ICAI and other private Institutes. He has teaching experience of more than
10 years
CA.M.V. Ramachandra Rao

CA.M.V.Ramachandra Rao is a practicing Chartered Accountant and teacher by


nature. He is a Post Graduate in commerce and Associate Member of Institute of
Chartered Accountants of India. He has 9 years of teaching experience in field of
taxation at various levels of professional courses and has rich professional and
corporate experience in Audit, IFRS compliances and taxation matters of various blue
chip companies. He taught more than 9,000 aspirants at various levels of Chartered
Accountant course. He is ranked as "THE BEST" for taxation and quite popular among
student fraternity as "GREATEST TAX GURU".
Prof. Rajeshwar

Prof. Rajeshwar is a reputed faculty for Information Technology & ISCA teaching at various
ICAI Branches and other reputed Institutes all over India. He has more than 22 years of
experience for teaching the CA students. He is known as Techno Pandit.
Dr. P.R. Vittal

Dr. P.R. Vittal is currently guiding the research scholars in the field of Mathematics in
Differential Equations, Probability & Statistics, Stochastic Processes and also being
Advisor to students for Ph.D at University of Madras, Statistics Dept. By his sheer
passion for the profession, he is also handling classes for CA CPT Students and CA
Final Students.

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