Your cart is currently empty!
Author: Bill Campbell
Arbitrage
Arbitrage means the ability to earn a profit without risk. One method by which arbitrage is commonly accomplished by buying an asset in one market, and simultaneously selling an identical asset in another market at a higher price (e.g., T-Notes or T-Bonds). Another is by borrowing an asset (e.g., a currency) and investing it at…
Covariance and Correlation
Covariance Covariance is just an extension of the idea of variance: instead of looking at how numbers in one data set deviate from their mean, you look at how numbers in two data sets deviate from their respective means together. We start with the formula for variance (of a population): \[\sigma^2\ =\ \frac{\sum_{i=1}^N \left(X_i\ –\…
Beta
It is not surprising that many CFA candidates (at all levels, not just Level I) have a poor understanding of beta, because a survey of a number of financial websites with glossaries (not the little, obscure ones; the big boys, such as Charles Schwab, Citibank, Deutsche Bank, E-Trade, Investopedia, Putnam Investments, TD Ameritrade, and others)…
Dummy Variables
The idea of a dummy variable is fairly simple: it’s a variable that can take on a value of 0 or 1; it simply shows the absence (0) or presence (1) of some characteristic. Nevertheless, there are some important rules you need to remember about dummy variables. How Dummy Variables are Used Imagine that you’re…
Covered Interest Rate Parity (IRP) – Pricing Currency Forwards
Pricing currency forward contracts – determining the appropriate future exchange rate to use – is relatively straightforward; it is based on the risk-free interest rates for the currencies involved, and the no-arbitrage condition (i.e., the forward exchange rate should make arbitrage impossible). Because the elimination of arbitrage means that the forward exchange rate has to…
Nominal vs. Effective Interest Rates
The ideas behind nominal and effective interest rates are fairly simple, but you need to be sure that you understand the differences, and that you know which convention is used for which common rate quotes. At the heart of the difference is the idea of compound interest, so let’s start there. Throughout this article, we’ll…
Currency Exchange Rates
Many candidates find currency exchange rates to be confusing, and for good reason: the notation used is not intuitive at all (and, to boot, contradictory). We’ll discuss the notation, how to use exchange rates in calculations to convert from one currency to another, how to invert exchange rates, and how to derive cross exchange rates.…
Calculating Spot Rates (from Forward Rates)
A spot interest rate is a discount rate that takes a single payment at one point in the future and discounts it back to today; a forward rate is a discount rate that takes a single payment at one point in the future and discounts it to another (nearer) time in the future; they each…
Yield Measures (Fixed Income)
There are a number of types of yield measures for bonds; you need to know how they are calculated, the assumptions that underlie them, and their strengths and weaknesses. The measures of interest are: Nominal yield Current yield Yield to maturity Yield to call Yield to refunding Yield to put Yield to worst Cash flow…
Comparing Yield Measures (Quant)
The article on yield measures mentions five measures of interest: Bank Discount Yield (BDY, or rBD) Holding Period Yield (HPY) Effective Annual Yield (EAY) Money Market Yield (MMY or rMM) Bond Equivalent Yield (BEY) Unfortunately, you cannot compare these to each other directly; for example, if one investment has a BEY of 6.125% and another…