Level I

The idea of free cash flow is fairly straightforward: it’s cash flow that a company may use in any way it chooses (within reason, of course; for example, we’ll consider only legal uses here).  There are several types of (and, consequently, definitions for) free cash flow.  In this article, I’ll describe one of those: free […]

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The idea of free cash flow is fairly straightforward: it’s cash flow that a company may use in any way it chooses (within reason, of course; for example, we’ll consider only legal uses here).  There are several types of (and, consequently, definitions for) free cash flow.  In this article, I’ll describe one of those: free […]

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The idea of interest rate parity (IRP) is pretty simple.  In a nutshell, it says that if hold a particular currency – say, GBP – and you want to to make a risk-free investment of that currency, you should earn the risk-free interest rate for that currency for the length of time of your investment.  […]

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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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