Grinold and Kroner

Despite discussions on the treatment for the change in outstanding shares, there remains some doubt on the correct approach. The answer to a question in the Schweser exam kit Vol 2 Exam 2 Afternoon session 22.1 shown that a negative change must be added which is keeping with the -S. However in the CFA exams where the change is negative it is deducted. Which is correct or are both correct depending on who you respond to?

It makes sense to remember what the term is. Companies return capital to shareholders directly in one of two ways : 1. By making dividend payments, which usually come out of earnings 2. By buying back shares of stock , thus reducing capital employed Since the act of reducing shareholding makes the company more valuable to the remaining shareholders ( because their interests in future profits are increased , given lower number of shares) , we treat a change in shares to the negative as a good thing. while a change to the positive i.e. a net issuance of additional shares ( representing a dilution of the current shareholders interest) as a bad thing. So delta S is simply the period to period change in shares ( signed ) ,while the meaning to the shareholder is attributed with a negative sign in GK’s formula. +ve delta S ( net increase of shares) = bad thing i.e. has an effect of -( delta S) -ve delta S ( net reduction of shares) = god thing i.e. has an effect of -( delta S) where the term in parenthesis is a negatively signed quantity

janakisri, what’s “+ve”? thanks.

the worst result on a std test…

+ve = positive -ve = negative

Thanx. For G-K, (+ve delta S) is like +ve STD test result, very bad. :slight_smile:

cfahead Wrote: ------------------------------------------------------- > Despite discussions on the treatment for the > change in outstanding shares, there remains some > doubt on the correct approach. The answer to a > question in the Schweser exam kit Vol 2 Exam 2 > Afternoon session 22.1 shown that a negative > change must be added which is keeping with the -S. > However in the CFA exams where the change is > negative it is deducted. Which is correct or are > both correct depending on who you respond to? I believe you are talking about the 2009 test. IIRC, the language on the negative stock purchase was “repurchase yield” or something like that. It was presented as a negative yield, so that is how they wanted you to treat it in the calculation. You are going to have to be careful how it is worded. If if is simply presented as a share buyback, then it is anti-dilutive, and consequently a “good thing.”

my fellow analist …no matter how it is presented just ask urself how it affects the stock price…share buyback = share appreication so contribs positively to E® for

Look at Qu 5 in the 2009 morning session, the repurchase yeild was negative and was deducted from the dividend yeild. Like Janakisri I am also of the view that a reduction of the repurchase yeld should benefit the return to shareholders and should be added but it appears that the CFA treats a minus sign as a reduction. Any further thoughts

If the repurchase yield is negative, doesn’t that mean repurchases decreased, which is a negative benefit to the shareholder? I never heard the term repurchase yield before, but am interpreting it as: shares repurchased/total shares outstanding

Share purchases do not change the shareholder share of the company. But what has changed is that the company transfers cash to the shareholder. Transferring cash to the shareholder is the same as a dividend payout. Thus, share purchases is *equivalent to a dividend distribution. Thus, the % reduction of shares outstanding has a positive effect to the expected return just as the dividend yield has the positive effect on the expected return. *This is L2 material.

share repurchase = good for investors = increases expected return

If the question gives the equity repurchase yeild as negative.5% should that be added or taken away from the Dividend yield?

Maple leaf a Canadian Corporation is long 100 JPY put options (European Style) with expiration in six months, a strike price of 100 JPY/ CAD, and a contract size of JPY 12.5M. The current spot exchange rate is 102.5 JPY/CAD. What is the value of the potential credit risk to Maple Leaf?

cfahead Wrote: ------------------------------------------------------- > If the question gives the equity repurchase yeild > as negative.5% should that be added or taken away > from the Dividend yield? It should be taken away from Dividend yield.

cfahead , sure you’re in the right thread? This is about GK and shares , but you’re asking about credit risk? Answer is zero credit risk as the option is out-of-the-money

janakisri Wrote: ------------------------------------------------------- > cfahead , sure you’re in the right thread? This is > about GK and shares , but you’re asking about > credit risk? Answer is zero credit risk as the > option is out-of-the-money He is asking of the potential credit risk, not at the current moment. He mentioned in his question that it is six month European option. Btw, why would you say that it is out of money now. It is a JPY put making the option in-the-money right now. The convention he quoted is JPY/CAD not CAD/JPY. Please let me know.

It’s long JPY. If it’s in the money, you need to give RFR to calculate the credit risk?

you’re right , sucker me. Not thinking clearly JPY put is in the money if the JPY depreciates . So the company faces credit risk if it is a non-exchange option

Different question,should have been separate. My apologies. Trying to work and do this at the same time does provide a fair amout of challenge.