Level I

The idea of roll yield – or roll return, same thing – is relatively straightforward: it’s part of the increase or decrease in the value of your portfolio that arises specifically when you roll over an expiring futures or forward contract into a new contract.  The other part of that increase or decrease is the […]

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As a mathematician, I’ve been trained to write and speak (and, consequently, to think) using precise, accurate terminology.  There are, of course, occasions when even mathematicians abbreviate the things that they write or say, but on those occasions: We know that we’re abbreviating, and All mathematicians have agreed to the abbreviations used. As an educator, […]

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Absolute Advantage Absolute advantage is quite easy to understand: if it costs less in country A to make a product than it costs in country B, then country A has an absolute advantage over country B in the production of that product. Easy-peasy. Comparative Advantage Comparative advantage is a bit more complicated.  It depends not […]

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No discussion of conservative methods vs. aggressive methods would be complete without a clear definition of what we mean by these two categories of methods.  Therefore, let’s start there: Conservative accounting methods are those that report lower net income in the current period, and (potentially) higher net income in future periods. Aggressive accounting methods are […]

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Various interest rate derivatives are, in fact, equivalent to each other; i.e., they can be structured to generate equivalent (though not necessarily identical) cash flows.  This article will explain how these derivatives can be structured to be equivalent to each other. First note that you will not be asked on an exam to create equivalent […]

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This article’s going to turn out to be fairly short, but, I hope, quite useful.  It has pictures. Floating-Rate Inflow: Rates are Expected to Decrease Here’s the situation: you own a portfolio of investments (floating-rate bonds) paying 6-month USD LIBOR + 100bp; payments are every 6 months for the next three years.  You’re concerned that interest […]

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When I was an undergraduate student in university, I was fortunate enough to have to have written only two term papers.  One was in the capstone business management class I took my last semester, and the other was in a class in mathematical modeling.  The term paper I wrote for the latter class was on […]

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When the price of a good changes, there are two effects on the demand for that good: The substitution effect, which is a relative effect (i.e., how the demand for that good, by itself, changes relative to the demand for other goods) The income effect, which is an absolute effect (i.e., how the demand for […]

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After reading a number of posts on AnalystForum in which candidates have had difficulty with linear interpolation or extrapolation, I figured it was time to write an article on the subject.  At Level I it applies to binomial trees for calculating the weights for equity options, and for combining risky portfolios with the risk-free asset […]

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An equity index is nothing more nor less than a hypothetical stock portfolio.  The index pretends to invest in a bunch of stocks, and tracks their performance over time.  It’s the sort of thing that you may have done in a high school economics or history class.  I did, at least. I don’t intend to […]

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