Archives

All posts for the month March, 2014

Justified Ratios (Price Multiples)

Posted by Bill Campbell III, CFA on March 26, 2014
Posted in: Level II Equity.

In general, price multiples – P/E ratio, price-to-book-value, and so on – are used for relative value comparison,  not absolute value.  That is, a company’s price multiples are generally compared to those of similar companies to determine whether the company’s stock is overpriced, fairly priced, or underpriced compared to the stock of its peers.  The […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level II Membership

This will give you access to this and all other articles at that membership level.

Convexity

Posted by Bill Campbell III, CFA on March 25, 2014
Posted in: Level I Fixed Income.

As we’ve seen in the article on duration, the duration of a bond (whether Macaulay duration, modified duration, or effective duration) is not constant; amongst the factors that cause (all types of) duration to change is the bond’s yield to maturity (YTM). Because duration changes with YTM, using only a bond’s (or bond portfolio’s) modified […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level I Fixed Income Membership, CFA® Level I Membership

This will give you access to this and all other articles at that membership level.

CFO – Indirect Method

Posted by Bill Campbell III, CFA on March 22, 2014
Posted in: Level I Financial Reporting and Analysis.

There are two methods to arrive at a company’s cash flow from operations (CFO): the direct method and the indirect method.  Companies that file their financial statements with the SEC are required to use the indirect method to present CFO, covered here.  The direct method is covered in a companion article. The idea of the […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level I Membership, CFA® Level I Financial Reporting and Analysis (FRA) Membership

This will give you access to this and all other articles at that membership level.

CFO – Direct Method

Posted by Bill Campbell III, CFA on March 22, 2014
Posted in: Level I Financial Reporting and Analysis.

There are two methods to arrive at a company’s cash flow from operations (CFO): the direct method and the indirect method.  Companies that file their financial statements with the SEC are required to use the indirect method to present CFO, covered in a companion article.  Because the direct method is not required by the SEC […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level I Membership, CFA® Level I Financial Reporting and Analysis (FRA) Membership

This will give you access to this and all other articles at that membership level.

Mark-to-Market Value of a Currency Forward Contract

Posted by Bill Campbell III, CFA on March 17, 2014
Posted in: Level II Economics.

In Level II economics we’re given the formula for the mark-to-market value of a currency forward contract.  Similarly, in Level II derivatives we’re given the formula for the value of a currency forward contract.  These two formulae look rather different from each other. In fact, they are identical (after accounting for the difference between nominal […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level II Economics Membership, CFA® Level II Membership

This will give you access to this and all other articles at that membership level.

The Synthetics: Cash, Equity, and Fixed Income

Posted by Bill Campbell III, CFA on March 12, 2014
Posted in: Level III Derivatives.

Creating synthetic cash from an equity portfolio or a fixed income portfolio, creating synthetic equity from cash, and creating synthetic bonds from cash are, in principle, no different than adjusting the value/beta of an equity portfolio, or adjusting the value/duration of a fixed income portfolio, except for that one pesky characteristic of cash: cash always […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level III Membership, CFA® Level III Derivatives Membership

This will give you access to this and all other articles at that membership level.

Adjusting the Value/Duration of a Fixed Income Portfolio using Bond Futures

Posted by Bill Campbell III, CFA on March 10, 2014
Posted in: Level III Derivatives.

Adjusting the Value of a Fixed Income Portfolio The typical formula for computing the number of bond futures contracts needed to adjust the value of a fixed income portfolio is: \[N_f\ =\ \frac{V_T\ -\ V_P}{V_f}\left(\frac{Dur_P}{Dur_f}\right)\left(yield\ \beta\right)\] where: \(N_f\): number of bond futures contracts to buy (i.e., take the long position) or sell (i.e., take the […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level III Membership, CFA® Level III Derivatives Membership

This will give you access to this and all other articles at that membership level.

Adjusting the Value/Beta of an Equity Portfolio using Equity Futures

Posted by Bill Campbell III, CFA on March 10, 2014
Posted in: Level III Derivatives.

Adjusting the Value of an Equity Portfolio The typical formula for computing the number of equity futures contracts needed to adjust the value of an equity portfolio is: \[N_f\ =\ \frac{V_T\ -\ V_P}{V_f}\left(\frac{\beta_P}{\beta_f}\right)\] where: \(N_f\): number of equity futures contracts to buy (i.e., take the long position) or sell (i.e., take the short position) \(V_T\): […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level III Membership, CFA® Level III Derivatives Membership

This will give you access to this and all other articles at that membership level.

Cash (Currency): the Wonky Commodity

Posted by Bill Campbell III, CFA on March 10, 2014
Posted in: Level I General, Level II General, Level III General.

Throughout Level II and Level III – and a little bit at Level I – we see calculations that involve commodities; e.g., calculating the price or value of a forward or futures contract on an underlying commodity. In all of those calculations, the quantity of the commodity is constant; for example, if you’re given the […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level I Membership, CFA® Level II Membership, CFA® Level III Membership

This will give you access to this and all other articles at that membership level.

Leases: General

Posted by Bill Campbell III, CFA on March 10, 2014
Posted in: Level I Financial Reporting and Analysis, Level II Financial Reporting and Analysis.

A lease is a contract that lets one party use an asset owned by another party, in exchange for periodic payments.  The owner of the asset is the lessor; the user of the asset is the lessee.  For the purposes of financial reporting, leases are divided into two categories, based on the economic substance of […]

This article is for members only.  You can become a member now by purchasing a

CFA® Level I Membership, CFA® Level I Financial Reporting and Analysis (FRA) Membership, CFA® Level II Membership, CFA® Level II Financial Reporting and Analysis (FRA) Membership

This will give you access to this and all other articles at that membership level.