I came across an example where “the p-value of 0.33 is high, thus xyz will fail to reject null hypothesis.
In the absence of a significance level to compare with, what would be a reasonable demarcation of p value to conclude as above?
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P value threshold
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Change in steepness and level fixed income
“Consider a portfolio of zero-coupon bonds that mature at different times in the future. Changes in interest rates are not always parallel across maturities, so let’s analyze what happens as rates change across the yield curve. Let’s assume that the portfolio has sensitivities to factors as provided in Exhibit 3. The portfolio has equal weightings in each key rate duration and an effective duration of 4.7. I would like you to assess the impact on the return of the portfolio if rates rise evenly across the curve and also when the curve flattens but does not twist.”
Exhibit 3 Factor Movements per One Standard Deviation Shift and Portfolio Key Rate Durations
Year 5 10 30
Parallel 1 1 1
Steepness 1 0.5 –1
Curvature 0.5 0 1
Rate Durations 1.8 3.6 8.7
Assuming rates change as described by Akron and based on Exhibit 3, the impact on the portfolio as outlined in Module 6 would be most likely be a loss in value from changes in:
A level and a gain from changes in steepness.
B steepness and a gain from changes in curvature.
C level and a loss from changes in steepness.
The answer is 3 as per cfai
But I think it should be 1… Because the 30 year key rate duration is the highest and greater than the combined duration of 5 and 10 years and because the steepness has resulted in negative ytm of 1% for 30 years… it should be -(1 x 1.8 x .33) - (0.5 x 3.6 x 0.33) - (-1 x 8.7 x .33) = gain due to change in steepness!!
Can any one clarify… This is really making me crazy
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Share Repurchase
Best way to tackle this problem? Calculate EPS after share repurchase.
Jeff Roth is a corporate finance manager at BLB Ltd. The company plans to pay back some of its excess cash to the shareholders. Jeff has recommended the share repurchase method for returning the cash to the shareholders. The current earnings per share are $3.2. The stock is trading at a price of $40 per share. The company doesn’t have enough cash to buy back the shares. It is planning to borrow debt for repurchasing of shares. The debt raised by the company is currently yielding 12%, and it can borrow more debt at the same rate. It will be using a mixture of cash and borrowing debt to repurchase the share. 40% of the total repurchase amount will be paid via cash of the company and rest 60% will be borrowed. The cash of the company is earning an after-tax yield of 6.4%.
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Schweser practice exam 4 (morning session) - Question 44 - Derivatives
Relevant fraction of the problem:
“AHI also manages a growth portfolio, currently valued at $10,000,000. The growth portfolio is very similar in composition to the S&P 500 Index, which currently stands at 2,250. Due to an uncertain political climate, AHI is concerned that this portfolio might experience a high degree of volatility over the next 12 months. As a result, the firm is considering using derivatives to hedge the portfolio’s exposure.
Ramiro suggests two possible approaches to hedge the risk:
Approach 1
Enter into a one-year total return equity swap, with quarterly settlement dates paying the equity return and receiving 90-day LIBOR. Payments on the swap would be netted, except in the case where the equity reference portfolio falls in value. In this case, AHI would have to pay 90-day LIBOR plus the fall in equity value.”
Question related to the problem:
Approach 1 to hedging the growth portfolio is most likely described:
Correct answer:
incorrectly as AHI would need to enter as the floating rate receiver.
Explanation:
To hedge the return on an equity portfolio, AHI would pay equity and receive the floating rate (LIBOR). However, if the return on the equity portfolio was negative, it would receive this return (i.e., “pay” a negative return) and also receive 90-day LIBOR.
MY CONFUSION:
doesn’t he give up ALL returns (negative or positive) in favor of receiving libor? Why does he pay with positive returns, but has to bear the negative ones too? Where is his benefit?
Or do I simply not understand the explanation…?
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got lazy this weekend..worth trying to make it up during the week?
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Residual Dividends and Capital Expenditure
In residual dividend method:
Are dividend calculated after deducting equity contribution for capital expenditure only or working capital expenditure as well??
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Portfolio Management Question - Active Management
This is the last question from Konvexity Mock One PM
Relevant info,
Fund A: IR=.5, active risk=10%
Benchmark: Sharpe=.8, total risk=15%
In order to achieve optimal level of active risk, the investor invests 6.25% in the Benchmark and 93.75% in Fund A. What is the excess return over risk-free rate that is expected to be generated by the portfolio of the investor?
A) 12.69%
B) 14.69%
C) 16.69%
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Arbitrage pricing theory assumptions
APT makes 3 assumptions, one of which is…
There are many assets, so invesetors can form well-diversified portfolios that eliminate asset-specific risk… (but not factor risk)… why is that?
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where to do practice ethics questions
should i focus on the online CFA or the EOC for practice ethics questions this week? I will be limited on time
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Probability of Default and Expected Loss
Do you all think we will have to have the equations memorized or just understand them?
• Probability of default = 1− e^−lamda(T−t)
• Expected loss = K[1− e^−lamday y (T−t) ]
• Present value of expected loss = KP(t,T) − D(t,T) = KP(t,T)[1− e− (T−t) ]
Credit spread = Credit spread = yD(t,T) − yP (t,T) =
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CFAI mock PM (printable) q14
Question 14 regarding remeasurement gain (answer A $2.526m) - did anybody actually get this within a space of 10 minutes? 3 minutes is ridiculous for this amount of working.
Also getting very confused with the conversion of currencies I.e. price/base - does CFAI present is as standard in this manner? I am typically used to base/price. Thanks!!
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Arbitrage with portfolios
Someone posted the below on a portfolio question on factors on CFAI, and I have no idea the answer (both in the real world or for the exam).
Is the factor (ROE) assumed to be the same across the world? I understand that if we were comparing portfolios in the same country and using GDP as a factor then it would influence them all the same. It seems unlikely that ROE will be consistent across all of those areas. It doesn’t give you an option to choose this but should we just always assume the factor will be the same for all portfolios?
Test question: is there arbitrage possibilities?
Portfolio
Expected Return
Factor Sensitivity
Eurozone
11.9%
0.3
North America
10.7%
0.8
Pacific Rim
13.7%
0.5
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confusing q on valuing forward rate contracts in the derivatives practice.
Parisi proceeds to review an equity forward contract held by Quantum. The contract was initiated thirty days ago when the fund expected a large inflow of cash in 60 days. In order to hedge against a potential rise in equity values over this period, Quantum entered into a long forward contract on the UAX 300 Index expiring in 60 days. Sheroda tells Parisi that she estimates the current price of this contract to be USD 1457.38. Parisi collects the information in Exhibit 1 for his review.
Exhibit 1
Selected Financial Information for UAX 300 Forward Contract
Price of a 60-day UAX 300 forward contract 30 days ago
USD1403.22
UAX 300 Index level today
USD1450.82
Annualized continuously compounded risk-free rate
3.92%
Annualized continuously compounded dividend yield for UAX 300
2.50%
q: Based on the data in Exhibit 1, and given Sheroda’s value of the UAX 300 forward contract, the arbitrage profit is most likely to be:
- greater than zero.
- less than zero.
- zero.
answer is 1 which is fine. I dont understand the explanation though.
” The forward contract on the UAX 300 was entered into 30 days ago at a price of 1,403.22. Currently, with 30 days remaining on the contract the value is
F0(T) = S0e(rc−g)T = 1450.82e(0.0392 − 0.025)(30/360) = 1,452.54. An arbitrageur would sell the futures contract, buy the underlying, and earn a risk-free profit of 4.84.”
why are we using the current price of the forward contract of 1457? what happened to the 1403 that we entered into at inception? that’s what we will need to base our arbitrage profits on right? usually the questions say the spot price has changed and the compute the value to long/short. here its the forward price. can someone pls clarify whats going on here?
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CDS Buyer
If we buy CDS protection, how do we use the CDS coupon and CDS spread to know if we receive a premium or pay one? Say the CDS spread is 3.2% and the CDS coupon is 4.5%. I think if the CDS coupon is greater than the CDS spread, we receive the coupon. Say the spread were to increase to 3.5%, would this be profit or loss to the protection buyer?
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Calculating FCFE
Hi, when calculating FCFE, capital expenditures (fixed capital investment) has to be deducted and net borrowing has to be added. However, what about given (not received) loans?
I’m working in construction company, which has many construction companies (SPVs) in their group. The company which I’m analysing regularly provides loans for other group companies. This amount is shown in Cash flows from investing activites statement.
According to formula, I shouldn’t deduct given loans, but from logical point of view, given loans for group companies is kind of like investing in those companies, like investing in fixed asset. So should I eliminate given loans in such case when I’m calculating FCFE (or even FCFF)?
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carry adjustment for currencies
Sheroda is considering international securities but does not want to be exposed to foreign currency risk. She asks Parisi if there are derivative contracts to address this risk. Parisi comments, “there is a large market for foreign exchange forward contracts that are used to hedge this risk. Let’s assume you want to hedge a EUR investment back to USD. The carry adjustment in a currency derivative contract is very similar to other carry models such as equity derivatives. In this case, if the USD/EUR forward exchange rate is higher than the current spot rate, then the Eurozone interest rate must be lower than the US interest rate.”
can someone explain why the eurozone interest rate should be lower than the us interest rate. i understand the general idea of carry but i am struggling to conceptualize this for currencies.
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Hedging with options
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Livestock perishability
Just had a question about the characteristics of commodities, when I checked the answer it said livestock is “highly perishable” but when I checked the notes it mentions that the slaughtered meat is usually frozen and storable for “extended periods of time”. Also, it mentions that the animals are slaughtered when conditions are favourable, so in that sense the animal can live for years. None of this sounds highly perishable to me?
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Induction method inconsistency CFAI / Schweser
Hi everyone hope prep is going well
CFAI printable mock PM, question 45 shows value year 2 to be 103.522
My understanding is that the first value at year 2 should be 104 / 1.045 (Schweser way), not 0.5 x [(104/1.045) + (104/1.045)] +4 (CFAI mock answer).
Why is there differences in be approach here? Why is the extra 4 being added when we are already taking the 104 from year 3 (maturity). Please help!!! Thanks in advance
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Calculating beginning book value per share
(Schweser Residual Income Valuation EOC q3)
Does anyone know how we get beginning book value per share for 2018-2021 from the below?
For reference, the answer is: 2018: 10.62; 2019: 11.89; 2020: 13.32; 2021: 14.91.
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Josef Robien, CFA, is valuing the common stock of British Cornucopia Bank (BCB) as of
December 31, 2017, when the book value per share is £10.62. In this effort, Robien has
made the following assumptions:
- Earnings per share (EPS) will be 20% of the beginning book value per share for each of the next three years.
- BCB will pay cash dividends equal to 40% of EPS.
- At the end of three years, BCB’s common stock will trade at four times its book value.
- Beta for BCB is 0.7, the risk-free rate is 4.5%, and the equity risk premium is 5.0%.
Q: The residual income per share in 2020 and the present value of continuing residual income
as of the end of 2019 are closest to:
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