Category: Free

The CFA curriculum discusses a variety of methods for estimating the value of a company’s equity.  The approaches, or models, fall broadly into these categories (covered in separate articles; follow the links): Present value models (also known as discounted cash flow models) Dividend discount models (DDMs) Free cash flow to equity (FCFE) models Free cash…

What do we mean by “currency management“? In a nutshell, we mean managing (i.e., adjusting) our exposure to changes in currency exchange rates. We might, for example, Hedge 100% (or as close to 100% as we can get) of our exposure to exchange rates (that exposure arising from existing investments in securities denominated in currencies…

Here’s a list of the articles I have planned for Level III, but haven’t written and posted yet.  There’s some good stuff coming: Alpha/beta separation Analyst forecasts AO vs. ALM Asset Manager Code Behavioral factors Bounded rationality Cognitive errors Comparison of investor types Constraints Core-satellite portfolio Credit risk Currency hedging Currency risk Decision theory Efficient…

Here’s a list of the articles I have planned for Level II, but haven’t written and posted yet.  There’s some good stuff coming: ABSs ANOVA tables Arbitrage Pricing Theory (APT) CDOs CMOs Consolidation (acquisition method) Credit derivatives Equity method Fischer F-statistic Goodwill H-model Multifactor models Multiple regression Mundell-Fleming OCI Option strategies Short box spread Short…

Here’s a list of the articles I have planned for Level I, but haven’t written and posted yet.  There’s some good stuff coming: ABSs Bond amortization CDOs CFF CFI CMOs Depreciation Dividends DuPont Efficient frontier Forward discount/premium Income tax expense LIFO reserve OCI OPA Option payoffs Pictures (in Economics) Project evaluation Ratios Revenue recognition Risk…

If you haven’t read the article on option strategies in general, that’s a good place to start, then return here. In particular, if you haven’t read the warning about calculating profit that appears at the end of that article, you should go read it now; the way I’m calculating the profit here is correct, but…

Candidates seem to have a tremendously difficult time with option strategies: how to construct various spreads, how to compute the payoffs on those spreads, how to compute the profits on those spreads, how to compute the breakeven underlying prices on those spreads, and why they would employ a particular spread. I’m here to tell you…

As an approach to asset-liability management (ALM), cash flow matching has advantages and disadvantages.  The primary advantages are that: It works perfectly. It is relatively simple to understand. The primary disadvantages are that: It can be costly (i.e., the interest that you earn on your assets may be low). It may be difficult to implement…

Binomial trees are used in a variety of contexts in finance: Calculating probabilities for Bayes’ Formula type problems Calculating the value of options on stocks, commodities, and so on Calculating the option-adjusted spread (OAS) for bonds Calculating the value of bonds with embedded options Calculating the value of floating-rate bonds Calculating the value of interest…

To create a binomial interest rate tree, you need to start with: A yield curve An interest rate volatility The yield curve can be a par curve, a spot curve, or a forward curve. (If you’re a bit fuzzy on the differences among these curves, look here.) For the remainder of this article, we’ll assume…