Leading Global Wealth Management Practice page 1

Copyright 2012 WMICHINA All Rights Reserved.

Qu a n t it a t ive r ef t o Book 1
Pa ge:

144: Tes t of s ign ifica n ce for t h e cor r ela t ion coefficien t
2
2
, 2
1
r n
t df n
r

= =

151: Ca lcu la t in g t h e con fid en ce in t er va l for a r egr es s ion coefficien t
( )
j

j c
b
b t s
152: Hyp ot h es is t es t for s ign ifica n ce of r egr es s ion coefficien t s


j j
j j j
b b
b b b
t
s s
-
= =
153: Pr ed ict in g t h e Dep en d en t Va r ia ble
0 1

p
Y b b X = +


154: Con fid en ce in t er va l for a p r e d ict ed va lu e

( )
s f
Y t s
2
2 2
2
1 ( )
1
( 1)
f
x
X X
s SEE
n n s
(

= + +
(

157: Us in g t h e ANOVA t a ble
Source of variation Degree of freedom Sum of squares Mean sum
of squares
Regression (explained) k = 1 RSS
MSR=
RSS
K

Error (unexplained) n-2 SSE
MSE =
SSE
2 n

Total n-1 SST
2
Explained variation(RSS) SST-SSE
=
Total Variatio(SST) SST
R =
2
SSE
SEE MSE
n
= =

159: Ca lcu la t in g a n d in t er p r et in g t h e F-s t a t is t ic r egr es s ion

18 3: Ca lcu la t in g a n d in t er p r et in g t h e F-s t a t is t ic m u lt ip le r egr es s ion
/
SSE / ( 1)
MSR RSS k
MSE n k
=


176: Tes t in g t h e s t a t is t ica l s ign ifica n ce of a r egr es s ion coefficien t

178 : Tes t in g r egr es s ion coefficien t s ( t wo-t a il t es t )

178 : Tes t in g r egr es s ion coefficien t s ( on e-t a iled t es t )
Leading Global Wealth Management Practice page 2
Copyright 2012 WMICHINA All Rights Reserved.
1
1
1
b
b b
t
s

179: Ca lcu la t in g a con fid en ce in t er va l for a r egr es s ion coefficien t
1 1
1 1 ( , )
c c
b b
b t s b t s +



18 5: Ca lcu la t in g R2 a n d a d ju s t ed R2
2
Explained variation(RSS) SST-SSE
=
Total Variatio(SST) SST
R =
2 2
1
1 (1 )
( 1)
a
n
R R
n k
( | |
=
( |
+
\ .

18 6: Us in g a n ANOVA t a ble wit h r egr es s ion ou t p u t

192: Hyp ot h es is t es t in g wit h d u m m y va r ia bles

196: Th e Br eu s ch -Pa ga n t es t
BP chi-square test = n
2
resid
R (df = k)
197: Us in g Wh it e-cor r ect ed s t a n d a r d er r or s

20 0 : Th e Du r bin -Wa t s on t es t for s er ia l cor r ela t ion
2
1
2
2
1
T
t t
t
T
t
t
DW
c c
c
. .

=
.
=
| |

|
\ .
=
| |
|
\ .

DW~2(1 - r), for very large-sized sample

220 : Us in g a Lin ea r Tr en d Mod el
0 1

( )
t
Y b b t = +


0 1
( )
t t
y b b t c = + +
224: Log-Lin ea r Tr en d Mod el
0 1
ln( ) ( )
t
y b b t = +
228 : For eca s t in g

231: Tes t in g a n AR m od el for p r op er s p ecifica t ion

230 : Mea n -r ever t in g t im e s er ies
0
1
1
t
b
x
b
=

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Copyright 2012 WMICHINA All Rights Reserved.
235: Fir s t d iffer en cin g

237: Det ect in g s ea s on a lit y

239: Cor r e ct in g for s ea s on a lit y in a t im e-s er ies m od el

240 : For eca s t in g wit h a n Au t or egr es s ive Mod el

242: ARCH ( 1) t im e s er ies

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Copyright 2012 WMICHINA All Rights Reserved.
Econ om ics r ef t o Book 1
Pa ge:

262: Th e r u le of 70
Approximate years to double = 70 / growth rate
265: On e-t h ir d r u le a p p lied t o p r od u ct ivit y s p eed u p
y/y = (1/3) (k/k) + T/T
30 2: Cr os s r a t e ca lcu la t ion
When the base currencies in the FX rate quotations are different, multiply down
(bid*bid, ask *ask)
When the base currencies are the same, divide cross (bid/ask, and ask/bid), the
larger value will be the ask, the smaller value will be the bid for the cross rate pair.
30 5: For wa r d FX Tr a n s a ct ion s

30 7: An n u a lized for wa r d r a t e p r em iu m a n d d is cou n t

30 8 : Ca lcu la t in g t h e for wa r d p r e m iu m / d is cou n t
360
100%
forward spot
spot days
| || |
| |
\ .\ .
OR
12
100%
.
forward spot
spot No monthsforward
| || |
| |
\ .\ .

30 9: For wa r d p r em iu m s or d is cou n t s fr om in t er es t r a t e p a r it y

30 9: Cover ed I n t er es t Ar bit r a ge

324: Ca lcu la t in g t h e exch a n ge r a t e p r ed ict ed by r ela t ive PPP
t
t X
t 0
0 Y
E(S ) 1+I
= ; S ,S X/Y
S 1+I
(
(


326: Ca lcu la t in g t h e r ea l in t er es t r a t e
nominal A real A
nominal B real B
1+R (1+R )[1+E(inflation A)]
=
1+R (1+R )[1+E(inflation B)]

R
nominal A
R
nominal B
= Einflation
A
- Einflation
B

327: Us in g t h e in t er n a t ion a l Fis h er r ela t ion
) ( 1
) ( 1
r 1
r 1
DC
FC
DC
FC
i E
i E
+
+
=
+
+
) ( ) (
DC FC DC FC
i E i E r r ~
328 : For eca s t in g s p ot r a t es wit h u n cover ed in t er es t r a t e p a r it y
1
0
1 ( ) 1 ( )
, ( )
1 ( ) 1
FC FC
FC DC
DC DC
E r r E s
E s r r
s E r r
+ +
= = ~
+ +

Leading Global Wealth Management Practice page 5
Copyright 2012 WMICHINA All Rights Reserved.
Fin a n cia l s t a t em en t a n a lys is r ef t o Book 2
Pa ge:

12: I n ven t or y cos t flow m et h od

16: Con ver t in g en d in g in ven t or y a n d COGS fr om LI FO t o FI FO
inv
FIFO
= inv
LIFO
+ LIFO reserve
COGS
FIFO
= COGS
LIFO
LIFO reserve
Tax saving = LIFO reserve * t

24: I n ven t or y wr it ed own
Under IFRS: Lower of cost or NRV, NRV = sales price - selling cost
Under US. GAAP: Lower of cost or market (replacement cost), NRV < Market < NRV
Normal profit margin

38 : Effect of ca p it a lizin g in t er es t

43: Effect of d ep r ecia t ion m et h od s on n et in com e

45: Ch a n ge in d ep r ecia t ion es t im a t e

47: As s et im p a ir m en t
IFRS: Annually, CV vs. recoverable amount (FV-selling cost), can be reversed
US. GAAP: Tested, two steps: recoverability test, CV vs. expected future cash flow then
measuring the loss, CV vs. recoverable amount (FV-selling cost)

50 : Ca lcu la t in g a ver a ge a ge a n d a ver a ge d ep r ecia ble life

52: Accou n t in g for lea s e

59: Dir ect fin a n cin g lea s e

70 : I n ves t m en t in fin a n cia l a s s et s

74: I m p lem en t in g t h e equ it y m et h od
Security Classification
Trading Available-for-Sale Held-to-Maturity
Carrying
value(Balance
sheet)
Fair market
value
Fair market value with
unrealized G/L in equity
Amortized cost
income
recognition
Dividends.
Interest.
Realized G/L.
Unrealized G/L
Dividends.
Interest.
Realized G/L
Interest.
Realized G/L
Leading Global Wealth Management Practice page 6
Copyright 2012 WMICHINA All Rights Reserved.
One line consolidation Basic
Initially recorded at purchase price (cost)
Subsequent periods
B/S Cost + (share results dividends) * %
I/S Earnings pickup (% share of NI)

75: Alloca t ion of p u r ch a s e p r ice over BV a cqu ir ed
Goodwill: = purchase price pro-rata BV of NA excess allocation to equipment
One line consolidation Basic + additional depreciation
Initially recorded at purchase price (cost)
Subsequent periods
B/S Cost + (share results dividends- excess allocation to
equipment depreciation) * %
I/S (share resultsexcess allocation to equipment depreciation) *
%

8 2: Good will u n d er con s olid a t ion
Full GW Partial GW
Allowed in both US GAAP and IFRS
= consideration / % of interests acquired
fair value of net assets

MI is stated (% of MI shareholders own)
(consideration / % of interests acquired)
Only allowed under IFRS
= consideration fair value of net assets X
% of interests acquired
MI is stated (% of MI shareholders own) X
FV of net assets


8 4: I m p a ir ed good will
IFRS: CV of reporting unit > recoverable amount
US GAAP: two steps
- CV > FV of reporting unit
- CV of goodwill - Implied FV of goodwill

113: Econ om ic p en s ion exp en s e
(Plan asset
end
- Plan asset
beg
)- (PBO
end
- PBO
beg
) - employers contribution

115: Recla s s ifyin g p en s ion exp en s e for a n a lyt ica l p u r p os e

136: Cu r r e n t r a t e m et h od

140 : Tem p or a l m et h od

149: Ad ju s t in g fin a n cia l s t a t em en t s for in fla t ion

179: Ca lcu la t in g a ccr u a ls u s in g t h e ba la n ce s h eet a p p r oa ch a n d t h e ca s h flow
s t a t em en t a p p r oa ch
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Copyright 2012 WMICHINA All Rights Reserved.
Accrual ratio, (AR)
B/S
= AA
B/S
/[(NOA
t
+ NOA
t 1
)/2]
AR
C/F
= AA
C/F
/[(NOA
t
+ NOA
t 1
)/2]
AA
B/S
= NOA
t
NOA
t 1
and NOA = (total assets cash) (total liabilities total debt)

213: Ca lcu la t in g Ma r ket va lu e d e com p os it ion

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Copyright 2012 WMICHINA All Rights Reserved.
Cor p or a t e fin a n ce r ef t o Book 2

234: Exp a n s ion p r oject a n a lys is
Initial outlay = FCInv. + NWCInv.
After-tax operating cash flows: CF = (S-C-D)*(1-T)+D=(S-C)*(1-T)+T*D
Terminal year after-tax non-operating cash flows: TNOCF =[ Sal
T
- (Sal
T
B
T
)*T] +
NWCInv

238 : Rep la cem en t p r oject a n a lys is
Initial outlay = FCInv + NWCInv [Sal
0
-T*(Sal
0
B
0
)]
Incremental operating cash flows = (S - C)*(1-t) + D*t
Terminal CF = [ Sal
T
- (Sal
T
B
T
)*T] + NWCInv

242: Pr oject s wit h u n equ a l lives _ EAA a p r oa ch

249: Pr od u ct ion -flexibilit y op t ion

252: Econ om ic a n d a ccou n t in g in com e
economicincome=aftertaxcashfloweconomicdepreciation
economicdepreciation=beginningmarketvalueendingmarketvalue

255: Econ om ic p r ofit
EP
t
=PV
t1
*WACC

299: Effect ive t a x r a t e u n d er a d ou ble t a xa t ion s ys t em

30 0 : Effect ive t a x r a t e u n d er a s p lit -r a t e s ys t em

30 1: Effect ive t a x r a t e u n d er a n im p u t a t ion s ys t em

30 2: Exp ect ed d ivid en d ba s ed on a t a r get p a you t a p p r oa ch
Expecteddividend=Div
t
1+EPS
t+1
*targetpayoutratio*adjustmentfactor

342: Boot s t r a p p in g ea r n in gs p er s h a r e

351: HHI
IndexHHI=
2
1
( 100)
n
i
i
MS
=

359: Va lu in g a m er ge r t a r get u s in g com p a r a ble com p a n y a n a lys is

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362: Va lu in g a m er ge r t a r get u s in g com p a r a ble t r a n s a ct ion a n a lys is

367: Eva lu a t in g a m er ger bid
V
AT
=V
A
+V
T
+SC(S=synergies,C=cashpaidtotarget)
GainstoTarget:Gain
T
=TP=P
T
V
T

GainstoAcquirer:Gain
A
=STP=S(P
T
V
T
)
Priceoftargetinstockdeal:P
T
=N P
AT

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Copyright 2012 WMICHINA All Rights Reserved.
Equ it y r ef t o Book 3

74: Em er gin g m a r ket
FCF = NOPLAT +Dep Fcinv Wcinv
NOPLAT = EBIT TAXES

96: On e- p er iod DDM
0
1
(1 )
t
t
t
D
V
r

=
=
+

97: Two- p er iod DDM
0 0
0
1
(1 ) (1 ) (1 )
(1 ) (1 ) ( )
t n n
s s L
t n
t
L
D g D g g
V
r r r g
=
+ + +
= +
+ +

98 : Th r ee- p er iod DDM
10 0 : GGM
0 1
0
(1 ) D g D
V
r g r g
+
= =


114: H-m od el
| | | |
0 0
(1 ) ( )
L s L
o
L
D g D H g g
V
r g
+ +
=

10 2: PVGO
V
0
=E
0
/r+PVGO

119: SGR
g=bROE=bROAL=b(netprofitmargin) (assetturnover) L

144: FCin v wit h lon g t er m a s s et
FCinv=gross PP&E
end
- gross PP&E
beg
OR revised FCinv = capital expenditures proceeds from sales of long term assets

149: FCFF & FCFE
FCFF==[NI+NCCWCInv]+Int(1T)FCInv
FCFE=FCFFIntX(1t)+Netborrowing
NCC
Depreciation(+)
Amortizationofintangibles(+)
Restructuringcharges(expense)(+)
Restructuringcharges(incomeresultingforreversal)()
Amortizationoflongtermbonddiscounts(issuer)(+)
Amortizationoflongtermbondpremiums()
Deferredtaxes(+)
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Copyright 2012 WMICHINA All Rights Reserved.
Fromnetincome
FCFF=NI+NCC+IntX(1t)FCInvWCInv
FCFE=NI+NCCFCInvWCInv+Netborrowing
Fromcashflowstatement
FCFF=CFO+IntX(1t)FCInv(underUSGAAP);
FCFE=CFOFCInv+Netborrowing
UnderIFRS,interestpaidcouldberecognizedaseitherCFOorCFI.
WhenderivingtheFCFfromCFO,payattentiontotheinterestspaid.
FCFFvs.EBIT&EBITDA
FCFF=EBITX(1t)+DepFCInvWCInv;
FCFF=EBITX(1t)+DepXtFCInvWCInv;
ForecastingFreeCashFlow
FCFE=NI(1DR)(FC
I
nvDep)(1DR)WCInv

160 : Sin gle s t a ge

ForFCFFvaluation:
1
o
FCFF
V
WACC g
=

ForFCFEvaluation: 1
o
FC F F
V
r g
=

160 : Two s t a ge
1
1
1

(1 ) ( ) (1 )
n
t n
t n
t
FCFF FCFF
Firm value
WACC WACC g WACC
+
=
= +
+ +

1
1
1

(1 ) ( ) (1 )
n
t n
t n
t
FCFE FCFE
Equity value
r r g r
+
=
= +
+ +

194: Nor m a lized ea r n in g

197: J u s t ified P/ E
leading:
1
1
/
b PR
P E
r g r g

= =


Trailing:
0
(1 )(1 ) *(1 )
/
b g PR g
P E
r g r g
+ +
= =


198 : J u s t ified P/ B
- -
Justified P/B= 1
- -
E
ROE r ROE g
r g r g
= +

198 : J u s t ified P/ S
0 0 0
0
( / )(1 )(1 ) P E S b g
S r g
+
=

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Copyright 2012 WMICHINA All Rights Reserved.

20 1: Pr ed ict ed P/ E

20 5: PEG
/ P E
PEG
g
=
20 8 : P/ CF

20 9: EV/ EBI TDA
EV = market value of common stock + market value of preferred equity + market value of
debt+minorityinterestcashandinvestments

230 : RI
234: RI va lu a t ion
RI=netincomeequitycapital*costofequity
RI
t
=E
t
(rB
t1
)=(ROEr)B
t

3 1 2
0 0 1 2 3
...
(1 ) (1 ) (1 )
RI RI RI
V B
r r r
(
= + + + +
(
+ + +

230 : EVA a n d MVA

EVA(economicvalueadded)=NOPATWACCTotalcapital=EBIT(1t)$WACC

$ NOPAT WACC
EVASpread ROC WACC
Invested capital Invested capital
= =
241-243: Ca lcu la t in g va lu e wit h a m u lt is t a ge RI m od el
V
0
=B
0
+(PVofinterimhighgrowthRI)+(PVofcontinuingresidualincome)
PVofcontinuingresidualincomeinyearT1=
e + r
RI
T
1
,persistencefactor 0 1 e s s .
PVofcontinuingresidualincomeinyearT1=
( )
1
T T T
P B RI
r
+
+

267: Ca lcu la t in g n or m a lized ea r n in gs for p r iva t e com p a n y

268 : I n cor p or a t in g s yn er gies

273: CCM
1
firm
FCFF
V
WACC g
=

1
Equity
FCFE
V
r g
=

273: EEM

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Copyright 2012 WMICHINA All Rights Reserved.
279: GPCM

28 1: GTM

28 5: Dis cou n t for p r iva t e com p a n y

1
1
1
DLOC
control premium
(
=
(
+


Totaldiscount=1[(1DLOC)(1DLOM)]
Leading Global Wealth Management Practice page 14
Copyright 2012 WMICHINA All Rights Reserved.
Alt er n a t ive r ef t o Book 4

14: Va lu a t ion r ea l es t a t e
( ) ( ) 1 1 1
n
t
t n
t
ATCF ATER
NPV I
r r =
= +
+ +

ATCF=NOIAnnualdebtservicetaxpayable
NOI=potentialgrossincomevacancyandcollectionlossesoperatingexpenses
Taxpayable=taxableincome*taxrate,Taxableincome=NOItaxdepreciationinterest
ATER=salespricesellingexpensesmortgagebalanceoutstandingtaxesonsale
Taxesonsale=taxondepreciationrecapture+taxoncapitalgain

28 : Va lu a t ion ca p it a liza t ion r a t e
Directincomecapitalization
0
0
NOI
R r g
MV
= =
bandofinvestmentmethod(BOI)
R
0
=(mortgageweight*mortgagecost)+(equityweight*equitycost)
mortgage cost: mortgage cost = annual interest cost + sinking fund factor (T*12 N,
r*100/12I/Y,0PV,1FV,CPTPMT*12assinkingfundfactor);OR,(T*12N,r*100/12I/Y,
1PV,0FV,CPTPMT*12asthemortgagecost,risannualinterestcost)
buildupmethod
R
0
=Pureinterestrate(interestrateofgovernmentbond)
+Liquiditypremium(thepremiumfortheilliquidnatureofrealestate)
+Recapturepremium(thereturnofinvestmentnetofappreciation)
+Riskpremium(thepremiumrequiredforriskexposureofagiveninvestment)

32: Rela t ive va lu a t ion on r ea l es t a t e
MV=grossincomegrossincomemultiplier(M);M
sale price
gross income
=
48 : Ca lcu la t in g p a yoff m u lt ip les a n d I RRs for equ it y in ves t or s

54: Ca lcu la t in g ca r r ied in t er es t wit h a h u r d le r a t e

55: Ap p lyin g d is t r ibu t ion wa t er fa lls m et h od s

62: Ca lcu la t in g p er for m a n ce m ea s u r es

68 : Ca lcu la t in g s h a r es is s u ed a n d s h a r e p r ice for a s econ d r ou n d fin a n cin g
PRE+INV=POST PRE=POSTINV POST=FV/(1+r)
N

f=INV/POST
Steps:
Determinethepostmoneyvaluation:POST=V/(1+r)t
Leading Global Wealth Management Practice page 15
Copyright 2012 WMICHINA All Rights Reserved.
Determinethepremoneyvaluation:PRE=POSTI;
Determinetheownershipfraction:F=I/POST;
ObtaintheNo.ofshares:y=x[F/(1F)]
Obtainthepriceofshares:p1=I/y;

70 : Ad ju s t in g t h e d is cou n t r a t e for t h e p r ob a bilit y of fa ilu r e
1
* 1
1 1
r r
r
t
t t
+ +
= =


71: Scen a r io a n a lys is t o a r r ive a t a n exp ect ed t er m in a l va lu e

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Copyright 2012 WMICHINA All Rights Reserved.
Fixed in com e r ef t o Book 4

112: An a lyzin g ca p it a liza t ion r a t ios
Long-term debt to capitalization ratio
longterm debt
longterm debt+minority interest+common&preferred equity
=

current liabilities
current liabilit
Total debt to capitalization ratio
+longterm debt
+longterm debt+minority interest+common&preferred eq i y es uit
=

113: An a lyzin g cover a ge r a t ios

EBITDA
annual interest expense
EBIT
annual interest expense

147: Com p u t in g t h e effect of a n on p a r a llel s h ift in t h e yield cu r ve

149: Ca lcu la t in g con t in u ou s ly-com p ou n d ed yield ch a n ges

168 : Va lu in g a ca lla ble bon d

170 : Va lu in g a n em bed d ed ca ll op t ion
call noncallable callable
V V V =
put putable nonputable
V V V =
174: Rela t ive OAS va lu a t ion

179-18 1:
Ca lcu la t in g t h e m in im u m va lu e of a con ver t ible bon d
Ca lcu la t in g m a r ket con ver s ion p r ice
Ca lcu la t in g m a r ket con ver s ion p r em iu m p er s h a r e
Ca lcu la t in g m a r ket con ver s ion p r em iu m r a t io
Ca lcu la t in g p r em iu m p a yba ck p e r iod
Ca lcu la t in g p r em iu m over s t r a igh t va lu e
Theconversionratio: 1convertiblebond#shares.
Theconversionprice=bondprice/conversionratio.
Leading Global Wealth Management Practice page 17
Copyright 2012 WMICHINA All Rights Reserved.
Conversionvalue=stockmarketpriceConversionratio
Straightvalue=thevalueofthebondifitwerenotconvertible.
Marketconversionprice=marketpriceofconvertiblebond/conversionratio
Marketconversionpremiumpershare=marketconversionpricemarketprice
Market conversion premium ratio = market conversion premium per share/market price of
commonstock
Premium payback period = market conversion premium per share/favorable income
differencepershare

Callableconvertiblebondvalue
=Straightvalueofbond
+Valueofthecalloptiononthestock
Valueofthecalloptiononthebond
Callableandputableconvertiblebondvalue
=valueofstraightbond
+valueofcalloptiononstock
valueofcalloptiononbond
+valueofputoptiononbond

197: Ca lcu la t in g a m or t ga ge p a ym en t

20 1: Com p u t in g t h e SMM
20 3: Ca lcu la t in g p r ep a ym en t a m ou n t
1
12

6% 1 (1 )
30
( )
x x
m begin at m
x
CPR CPR mPSA m CPR SMM CPR
PRE SMM Mort Scheduled principal pay for m
= = = =
=

20 7-20 8 : Ca lcu la t in g p r in cip a l p a ym en t s on a s equ en t ia l p a y t r a n ch e

236: SMM ca lcu la t ion for ABS

259: OAS a n a lys is of a n MBS

261-262: As s es s in g in t er es t r a t e r is k

M

min max
. P .
. . . .
. .
int
. .
.
.
M
S
straight value
value
conv value stock conv ratio
P ofbond
P
mark conv prem perS conv ratio
prem payback prd
coup
fav income diff perS
div perS
conv ratio

=

=

| |

|
\ .
= =

Leading Global Wealth Management Practice page 18

Copyright 2012 WMICHINA All Rights Reserved.
Der iva t ives r ef t o Book 5

11: No-a r bit r a ge for wa r d p r ice
15: Det er m in in g va lu e of a for wa r d con t r a ct p r ior t o exp ir a t ion
17: Ca lcu la t in g t h e p r ice of a for wa r d con t r a ct on s t ock
18 : Ca lcu la t in g t h e va lu e of a n equ it y for wa r d con t r a ct on a s t ock
19: Ca lcu la t in g t h e p r ice of a for wa r d con t r a ct on a n e qu it y in d ex
19: Ca lcu la t in g t h e va lu e of a for wa r d con t r a ct on a n e qu it y in d ex
20 : Ca lcu la t in g t h e p r ice of a for wa r d on a fixed in com e s ecu r it y
21: Ca lcu la t in g t h e va lu e of a for wa r d on a fixed in com e s ecu r it y
28 : Ca lcu la t in g t h e p r ice of a cu r r en cy for wa r d con t r a ct
29Ca lcu la t in g t h e va lu e of a cu r r e n cy for wa r d con t r a ct
FP= ( )
T
0 f
1+R S & V
t
=
(1 )
t T t
f
FP
S
R

(

(
+
(

;
Price:
FP(onTbill)=S
0
*(1+R
f
)
T

FP(onanequitysecurity)=(S
0
PVD)*(1+R
f
)
T
=[S
0
*(1+R
f
)
T
]FVD
FP(onanequityindex)=S
0
*e
(Rfg)*T
=(S
0
*e
g*T
)*e
Rf*T

FP(onafixedincomesecurity)=(S
0
PVC)*(1+R
f
)
T
=[S
0
*(1+R
f
)
T
]FVC
FP(currencyforwardcontract)=S
0
*[(1+R
DC
)
T
/(1+R
FC
)
T
)]
Value:
V
t
(longpositionduringlifeofcontractonTbill)=S
t
[FP/(1+R
f
)
Tt
)]
V
t
(longpositiononequity)=(S
t
PVD
t
)[FP/(1+R
f
)
Tt
)]
V
t
(longpositiononafixedincomesecurity)=(S
t
PVC
t
)[FP/(1+R
f
)
Tt
)]
V
t
(currencyforwardcontract)=[S
t
/[(1+R
FC
)
Tt
]/[F
T
/(1+R
DC
)
Tt
)]

23: Ca lcu la t in g t h e p r ice of a n FRA
25: Ca lcu la t in g va lu e of a n FRA a t m a t u r it y ( i. e. , cu b p a ym en t a t s et t lem en t )
26: Ca lcu la t in g va lu e of a n FRA p r ior t o s et t lem en t
pricingFRA:(1+L
(m)
m/360)(1+FRn/360)=(1+L
(m+n)
(m+n)/360)
valuinganFRAatmaturity/priortomaturity
t
m-t m+n-t
n
1+FRA
1
360
V= -
m-t m+n-t
1+L 1+L
360 360

41: Fu t u r es ca s h a n d ca r r y a r bit r a ge
42: Fu t u r e s r ever s e cu b a n d ca r r y a r bit r a ge
46: Ca lcu la t in g t h e p r ice of a T-bill fu t u r es con t r a ct
48 : Ca lcu la t in g t h e p r ice of a Tr ea s u r y bon d fu t u r es con t r a ct
48 : Pr icin g a T-Bon d fu t u r es con t r a ct wit h a d eliver y op t ion
49: Ca lcu la t in g t h e p r ice of a s t ock fu t u r es con t r a ct
50 : Ca lcu la t in g t h e va lu e of a fu t u r es con t r a ct on a n equ it y in d ex
51: Ca lcu la t e t h e p r ice of a cu r r e n cy fu t u r es con t r a ct
Leading Global Wealth Management Practice page 19
Copyright 2012 WMICHINA All Rights Reserved.
0
FP (1 ) FV(NC)
T
f
S R = + ;
0
FP (1 ) FV(NB)
T
f
S R = +
Treasurybondfuturescontractprice:
T
f
1
FP bond price (1+R ) FVC
CF
( =


Equityfuturesprice: FVD R S stock FP
T
f
+ = ) 1 ( ) (
0

Equityindexfuturesprice:
T R
e S index FP
) (
0
) (
o
=
60 : Us in g p u t -ca ll p a r it y
0 0 0
(1 )
T
f
X
C P S
R
+ = +
+

60 : Exp loit in g viola t ion of p u t -ca ll p a r it y

63: Ca lcu la t in g ca ll op t ion va lu e wit h a on e-p er iod bin om ia l m e
1
(1 )

1
f
f
R d
C C
C
R u d
+
+
t + t
= t =
+

64: Va lu in g a on e-p er iod p u t op t ion on a s t ock

65: Ca lcu la t in g a r bit r a ge p r ofit

70 : Ca lcu la t in g va lu e of a ca ll op t ion on a cou p on bon d

73: Va lu in g a n in t er es t r a t e ca p

8 1: Ca lcu la t in g ch a n ge in op t ion p r ice
8 4: Hed gin g wit h ca ll op t ion s
-
1 0 1 1
-
1 1 1 0
C -C C -C C
Delta= =Hedge ratio=
S -S S -S S
+
+
A
=
A

S ) N(d C
1
A ~ A
;
S 1] - ) [N(d P
1
A ~ A

10 3: Ca lcu la t in g t h e fixed r a t e on a s wa p wit h qu a r t er ly p a ym en t s
10 6: Va lu in g a p la in va n illa s wa p bet ween p a ym en t d a t es
4
1 2 3 4
1-Z
Fixed-rate has periodical payment C =
Z Z Z Z + + +

V(fixedpayer)=V(floatingratebond)V(shortfixedratedbond)

10 9: Ca lcu la t in g t h e fixed r a t e a n d n ot ion a l p r in cip a l on a cu r r en cy s wa p
111: Ca lcu la t in g t h e va lu e of a cu r r en cy s wa p a ft er in it ia t ion

112: Va lu in g a p a y fixe d , r eceive e qu it y r et u r n s s wa p
113: Va lu in g a r eceive equ it y r et u r n a n d p a y d iffer en t equ it y r et u r n s wa p
Leading Global Wealth Management Practice page 20
Copyright 2012 WMICHINA All Rights Reserved.
] 1 ) ( [
'
4
'
4
'
3
'
2
'
1
0
B B B B B C
S
S
t
+ + + +

115: Va lu in g a n in t er es t r a t e s wa p t ion a t exp ir a t ion

130 : Ca lcu la t in g t h e p a yoff for a n in t er es t r a t e ca p
131: Ca lcu la t in g t h e p a yoff for a n in t er es t r a t e floor
Leading Global Wealth Management Practice page 21
Copyright 2012 WMICHINA All Rights Reserved.
Por t folio r ef t o Book 5

150 : Exp ect ed r et u r n a n d s t a n d a r d d evia t ion for a t wo-a s s et p or t folio
Twoassetportfolio:E(RP)=w
1
E(R
1
)+w
2
E(R
2
)

p
2
=w
1
2

1
2
+w
2
2

2
2
+2w
1
w
2
COV
1,2
=w
1
2

1
2
+w
2
2

2
2
+2w
1
w
2

1,2


160 : Ca lcu la t in g t h e va r ia n ce for a n equ a lly-weigh t ed p or t folio
2
2
1 1
cov
p
n
n n

o = o +
2 2
1
p
n

o = o +
167: Ca lcu la t in g exp ect ed r et u r n fr om t h e CAL
167: Ca lcu la t in g s t a n d a r d d evia t ion fr om t h e CAL
( )
( )
T
T F
P F P
R
E R R
E R R o
o

= +

168 : Det er m in in g t h e a p p r op r ia t e a lloca t ion t o t h e r is k-fr ee a s s et a n d t o t h e

op t im a l r is ky p or t folio

173: Ca lcu la t e a n d in t er p r et t h e bet a of a s t ock
,
2
Cov
i mkt
i
mkt
|
o
=

175: Us in g t h e Sh a r p e r a t io
Sharpratio=
p f
p
r r
o

179: Ca lcu la t in g t h e m a r ket m od el for eca s t

i i i M i
R R = o +| + c
Themarketmodelpredictions
expectedreturnforasseti: ( ) ( )
i i i M
E R E R = o +|
varianceofasseti:
2 2 2 2
i i M c
o = | o + o
covariancebetweenassetsiandj:
2
,
cov
i j i j M
= | | o
adjustedbeta:
, 0 1 , 1 , i t i t i t
| = o + o | + v
18 2: Ca lcu la t e a n a d ju s t ed bet a

18 4: Com p u t e a s t ock r et u r n u s in g a m a cr oecon om ic fa ct or m od e l

18 6: Ca lcu la t in g a s t a n d a r d ized s en s it ivit y in a fu n d a m en t a l fa ct or m od el
Leading Global Wealth Management Practice page 22
Copyright 2012 WMICHINA All Rights Reserved.

18 8 : Ca lcu la t e t h e exp ect ed r et u r n for a p or t folio

190 : Ca lcu la t in g exp ect ed r et u r n fr om t h e a r bit r a ge p r icin g m od el

193: Ca lcu la t in g t h e in for m a t ion r a t io
( )
P B
P B
R R
IR
s R R

224: Ca lcu la t in g t h e d om es t ic cu r r en cy ex-p os t r et u r n

227: Ca lcu la t in g a for e ign cu r r en cy r is k p r em iu m

230 : Ca lcu la t in g exp ect ed r et u r n wit h t h e I CAPM