Your cart is currently empty!
Category: Level II
FCFF vs. FCFE
Occasionally, you will need to know how to compute free cash flow to equity (FCFE) given free cash flow to the firm (FCFF), or how to compute FCFF given FCFE. The formulae are relatively easy, but for sake of completeness I thought that I’d write a short article on them Recall that the formula for…
Roll Yield (Roll Return)
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 parts of that increase or decrease are the…
Pension Cost and Pension Expense
Defined benefit pension cost and pension expense – not the same as each other, by the way – are two topics that traditionally vex Level II candidates, and with good reason: They’re fairly complicated They’re usually explained poorly I cannot make them less complicated than they are, but I can do two things: I can make sure not…
Sloppy Language, Sloppy Thinking: Don’t Try This at Home
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,…
Modigliani & Miller
If the Level II CFA exam were given as an oral exam, 95% of the candidates would fail. Why? Because they cannot pronounce heteroskedasticity correctly (<het-ter-row-ski-das-tis-sit-tee>, eight syllables), and they cannot pronounce Modigliani correctly (<moe-dill-yaw-nee>, four syllables). Later in this article, we’ll hit upon another: homogeneous (<hoe-moe-gee-nee-us>, five syllables). Fortunately for most Level II candidates,…
Conservative Accounting Methods vs. Aggressive Accounting Methods
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…
Equivalence of Derivatives (Swaps, FRAs, and Interest Rate Options)
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…
Linear Interpolation/Extrapolation
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…
Box Spread
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…
Strangle
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…