Cheat Sheet

This was posted prior I only added a little to this sheet but I saw this I late May and thought If I was doing L2 I’d like to see this as early as possible. Good luck to all L2 students. off to L 3 Currency Translation Taking the quote from Reuters: EURUSD is @ 1.3177 GBPUSD is @ 1.4958. Where USD is the quoted currency. EURGBP is .8806 (GBP is the quoted currency here.) Let’s see if we can derive EURGBP using the dollar quotes. Don’t get caught up in the how base / counter , numerator or denominator stuff. Just think about it logically and you can’t go wrong. I’m sure there is a formulaic approach to this but I think it’s easier to think about it intuitively. If I can buy 1 euro for $1.3177 and 1 pound for $1.4958, how many pounds does it take to get one Euro? You should immediately realize this will be less than one since GBP is much stronger (i.e. it will take less GBP to get you a Euro because GBP is worth much more in dollar terms) So now simply divide - (1.3177) / (1.4958) = .8809 GBP to buy 1 EUR ACRONYMS Investment policy statement COPES - Constraint, Objectivity, Policy stmt, Expectation (of capital market - Mean/Variance analysis), Strategic Asset Allocation. Objectivity R&R - Risk and Return Constraints - TURTL - Time horizon, Unique Needs, Regulatory/legal req, Tax and Liquidity constraints Bid / Ask : Up the BO*BS and down the AS* Prudent rule: CLICS - Caution, Loyalty, Impartiality, Care, Skill Cost Leadership, Differentiation, Focus It describes three possible generic strategies that can be used to position a company for above average profitability, cost leadership is one of the three as stated above. - The market price will tend to be set near the cost of the least efficient producer whose output is still demanded. - The low cost producer can exert leadership by threatening to lower cost levels still profitable for itself, but (possibly) not profitable for others. - Achieving cost leadership usually requires large scale production facilities, vigorous cost control, large capital investment, proprietary technology. Risks in this strategy: - Requires standardization (reduces flexibility) if competitors imitate, it will lose its differentiation. - A technological change can make large investments in old technology obsolete. Yet, a firm with much invested in old technology may be unable to abandon it. - Product must be comparable to avoid discounted prices. Therefore cost leaders must achieve cost parity (acceptable/comparable products) and cost proximity (prices with good spread over costs, yet low enough to offset competitors’ better quality). - Requires a cost leader - if there is no clear cost leader, rivalry can be intense. - If firm loses control of key, low-cost inputs (raw materials), the firm’s competitive advantage threatened. Triangular fx artbitrage: (approximation) 1. Calculate the bid/ask cross rates (or just cross rate if no bid-ask info) 2. Find the difference between this rate and the quoted fx rate 3. Multiple the difference by the nominal amount I know its not exact, but it seems to be within 10% of the answer of correct answer PBO Balance sheet only reports net (ie. plan assets - PBO), if its negative its underfunded and a liability, if its positive then its overfunded and an asset and this is also called the funded status M&A There are 3 forms of integration: statutory (target dissolved), subsidiary (target becomes subsidiary), and consoldiation (whole new firm formed). The types are horizontal, vertical, conglomerate. There are also 2 forms of acquisition: stock purchase (payment to shareholders) and asset purchase (payment to company). And there are 2 forms of payment: cash or stock. a stock purchase means that the buyer purchases the entire entity…and with it comes all the assets and ALL the liabilities…even liabilities that happened before the transaction…a stock purchase does not mean you pay with cash or stock…the seller in a asset or stock purchase most of the time gets cash. in a asset purchase…the buyer gets to pick what assets it wants and it generally does not carry along any liabilities in the purchase…the seller is left with any liabilities arising out of the sold assets that were incurred in the past. think of purchase as acquisition and pooling as a merger. so when you are using purchase method, you have to finance the acquisition and the corresponding entries are financing inflow and investing outflow. in pooling you just have to consolidate your statements and re-state everything with no inflow/outflow Quant: SEE = RMSE = sqrt(SSE/(n-k-1)) [Root Mean Squared Error (RMSE) same as Standard Error of the Estimate (SEE)] Quant Mnemonics Sherlock Holmes, detective, had a nice pal named Watson with who he was chasing serial killers So Durbin WATSON helps to track and correct SERIAL correlation. Auto-correlation is the same thing as serial correlation. ===================== Breusch-Pagan test. Hetero/homo skedasticity Being a hetero myself, when I see the word hetero, what do I think of? Sex. What does sex do? Gets my heart pumping. What does that do? Affects my Blood Pressure. = BP ===================== If there is a unit root (i.e. b_{1} = 1), the time series is not time reverting and so it cannot be covariance stationary (not a good thing). If you are regressing two time series and exactly one series is non-covariance stationary, then the resultant series is also not covariance stationary. If both series are non-covariance stationary, you need to check for co-integration. Basically, use unit root as a quick way to check for non-covariance stationary. I believe the converse is not true: if a series does not have a unit root, it does not mean it is covariance stationary. That’s when you need to run the t-test on all the lags. irst differencing transforms a non-covariance stationary series into a covariance stationary one. Dickey-Fuller test is used to test whether or not two time series are cointegrated. You only do the DF test when you are regressing two time series into a new time series and you discovered that both input time series are non-covariance stationary. derivatives accounting: there is only one way for accounting for all derivatives. They show up on the Balance sheet at Fair Market Value. Once it comes to the types of uses: FV Hedge => Any realized / Unrealized gains / losses on Income Statement Cash flow hedge => Unrealized portion -> Direct to Equity, Realized gains / losses - to Income statement. Net investment hedge in a foreign sub -> Unrealized -> Direct to Equity. For all the 3 types of Hedges - any portion of the hedge that is NOT EFFECTIVE is realized on the Income Statement. Duration: Cash flow duration is a version of effective duration that allows for cash flows to change as interest rates change. Disadvantage: Based on the unrealistic assumption that a single prepayment rate exists over the life of a MBS for any given change in interest rates. Coupon curve duration is based on the relationship between coupon rates and prices for similar MBS. Disadvantages: 1) Limited to generic MBS, 2) Not readily applicable for CMO structures and other mortgage-based derivatives. Empirical duration is determined using regression analysis with historical prices and yields. Disadvantages: 1) Time series price data difficult to obtain, 2) Embedded options can distort the results, 3) Volatility of the spreads with reference to Treasuries can distort the price reaction to interest rate changes. Arbitrage (deciding which to borrow and which to sell): (1+rd) > ((1+rf)(F))/(So); Borrow Foreign…if you change it to " Forecasted FCFE: FCFE = NI - (1-DR)(CapEx-Depr) - (1-DR)WCInv. Here assumptions are being made: That the Target Debt Ratio of the company would continue to be maintained. As a result of that - (CapEx - Depr) is the total spend the company would have to make on the Cap. Exp portion. Of this - DR * (CapEx - Depr) is the Borrowing the company would do. WCInv is the spend on the Working Capital. Of this - DR * WCInv is the Borrowing the Company would do. Substituting back: FCFE=NI+NCC-WCInv-CapEx+Net Borrowing. = NI+Depr - WCInv - Capex + DR(Capex-Depr) + DR*WCInv = NI - (1-DR)(CapEx-Depr) - (1-DR)*WCInv. You are making the assumption about Net Borrowing - so this is a forecast measure. Econ IRP / Fisher / Uncovered IRP: interest - inflation -> Intl Fisher inflation - exchange rate -> relative PPP exchange rate - interest rate -> Uncovered IRP Interest rate - Forward discount/premium -> covered IRP exchange rate - forward discount / premium -> foreign exchange expectations FCRP = currency app – (rdc – rfc) Prudent Investor Diversification is expected of portfolio managers as a method of reducing risk. Trustees must base an investment’s appropriateness on its risk/return profile: how it contributes to the overall risk of the portfolio. Excessive trading (churning) as well as excessive fees and other transactions costs that are not warranted by the portfolio risk/return objectives should be avoided. Current income for the trust must be balanced against the need for growth. Trustees are allowed to delegate investment authority. In fact, this is a duty if the trustee does not have the required level of expertise The new Prudent Investor Rule makes five key changes to the traditional rules governing investment trust management. Use of total return. The new Rule measures reasonable portfolio return as total return (income plus capital growth). It also emphasizes that the trustee’s duty is to not only preserve the purchasing power of the trust but in certain cases to realize principal growth in excess of inflation. Risk management. Under the new Rule the trustee has the obligation to assess the risk and return objectives of the trust beneficiaries and manage the trust in a prudent manner consistent with those objectives, rather than to avoid all risk. Evaluation in a portfolio context. While the new Rule calls for the avoidance of undue speculation and risk, it also encourages trustees to view risk in a portfolio context. For example, stock options are risky when held in isolation but can actually reduce portfolio risk when held as part of a properly structured portfolio. Protective put options are an example of this type of strategy. Security restrictions. No securities are “off-limits” because of their riskiness when held in isolation. For example, under the old Rule options were not allowed, but under the new Rule they are, as long as the manager takes the portfolio perspective to analyzing risk. Delegation of duty. The old Rule did not permit trustees to delegate investment authority. In fact, investing in mutual funds or even index funds was deemed improper. The new Rule goes so far as to say that it may be the duty of a trustee (this is stronger language than just authority) to delegate, just as a prudent investor would. EBITA(tax rate) is valued in nominal terms so that you can find taxes in nominal terms (Because NOPLAT= EBITA-taxes) and working capital investment is also in nominal terms. EBITDA, capex, and depreciation are in real terms. Use FCF=NOPLAT+Dep-capex-working capital investment. Nominal ratios should equal real ratios. Emerging Mkts Valution Adjust NOPLAT by: 1. Capitalizing and amortizing R&D. Add back to NOPLAT. 2. Adding back charges on strategic investments. 3. Add back depreciation expense to NOPLAT 4. Eliminate Deferred taxes; use only cash taxes 5. Capitalize but don’t amortize goodwill; add back to NOPLAT. 6. Capitalize operating leases and adjust for nonrecurring items. Adjust invested capital by: 1. Adding back accumulated amortization to invested capital. PUFE bypasses IS and into Equity (BS). Hence BS is a real representation and IS might be over/under stated. P=Pensions U=Unrealized Gains / Losses due to Available for Sale Securities F=Foreign Exchange gains or losses E=Effective portion of a Cash Flow hedge. FI hedge - Normal 30 years mortgage with principal and interest Speculative - Interest only with principal will be paid in ballon Ponzi - No interest nor principal. You have an option to say FU if price doesn’t appreciate in future. Mergers based on Industry Life cycle: 1) Pioneer and development : Conglomerate and Horizontal 2) Rapid: Conglomerate and Horizontal 3) Mature: Horizontal and Vertical 4) Stabilized: Horizontal 5) Decline: Conglomerate, Vertical and Horizontal Investments to hold based on the business cycle 1) Recovery: Cyclical Stocks, Commodities and other Risky assets 2) Early Upswing: Stocks, Real Estate 3) Late Upswing: Bonds, Interest sensitive stocks 4) Slowdown: Bonds, Interest Sensitive Stocks 5) Recession: Stocks, Commodities Pre-offer defense mechanisms to avoid a hostile takeover include poison pills, poison puts, reincorporating in a state with restrictive takeover laws, staggered board elections, restricted voting rights, supermajority voting, fair price amendments, and golden parachutes. Post-offer defense mechanisms to avoid a hostile takeover include the “just say no” defense, litigation, greenmail, share repurchases, leveraged recapitalizations, the “crown jewel” defense, the “Pac man” defense, and finding a white knight or white squire. Pooling v. Purchase Pooling is 2006 - if I am not mistaken, not 2001 as stated above. In Pooling - BV of Target is added to BV of Acquirer - hence total assets do increase - but not by as much as when in the Purchase method where the BV of Acquirer is added to FV of the target - and hence assets would be much higher. Additionally - Pooling requires all past financial statements to be “recast” as though the two companies had been together as 1 entity since the very beginning. Even if Pooling occurs in the middle of the year - it is as though it had happened in the beginning of the year (in fact forever). Purchase method distorts net income - because it is effective as of the acquisition date. Higher asset base is depreciated (FV of asset is usually higher than Book value of assets of the target). Higher cost allocations of inventory, depreciation, interest expense and amortization expense cause the NI figure in the Purchase method to be lower than in Pooling - and hence the margins. Mixture of historical cost and fair values affects comparability under purchase. Pooling - since prior periods are restated - allows for better comparison. So Purchase -> Lower Turnover ratios - Fixed asset, Inventory, Total asset. (fv recognition of acquired assets and goodwill) - Higher cost allocations of inventory, depreciation, and identifiable intangibles (amortization expense) - leads to lower profitability ratios (Gross, Net and Operating profit margins). ROA - lower under purchase bcos of higher assets. Leverage - if debt is used for acquisition - Leverage will be higher. If Stock is issued for the acquisition -> Equity will go up. Standard Error or the Prediction (SEP) is slightly bigger than Standard Error of the Estimate (SEE). If you have SEE, make the CI using SEE and choose a slightly wider CI than the one calculated with SEE. NOPAT = EBIT(1-T) Current Service Cost Current Service Cost + Interest Cost - Expected Return on Plan Assets +/- Amortization of Past Service Cost (Benefit) +/- Amortization of Acturial Losses (Gains) Pension Expense (for the current period) Adjusted Funded Status - IFRS Funded Status +/- Unrecognized Past Service Cost (Benefit) +/- Unrecognized Acturial Losses (Gains) = Prepaid (Accrued) Pension Cost Pension Benefit Obligation Pension Benefit Obligation, Beginning + Service Cost + Interest Cost +/- Past Service Cost from Current Period Plan Amendments +/- Actuarial Losses (Gains) Incurred in the Current Period - Benefits Paid to Retirees = Pension Benefit Obligation, Ending Plan Assets Fair Value of Plan Assets, Beginning +/- Actual Return on Plan Assets +/- Plan Contributions - Benefits Paid = Fair Value of Plan Assets, Ending Funded Status of a Plan Funded Status = Fair Value of Plan Assets - PBO Fair Value of Plan Assets > Pension Benefit Obligation = Overfunded Fair Value of Plan Assets < Pension Benefit Obligation = Underfunded Economic Pension Expense Current Service Cost + Interest Cost - Actual Return on Plan Assets +/- Past Service Cost from Current Period Plan Amendments +/- Current Period Actuarial Losses (Gains) = Economic Pension Expense

thanks! :slight_smile:

You are awesome!!! Any tips you have for a level 1 candidate with a masters in finance from Nyu-stern who has only three months to study, with a demanding full time job?

MissYen88 Wrote: ------------------------------------------------------- > You are awesome!!! Any tips you have for a level 1 > candidate with a masters in finance from Nyu-stern > who has only three months to study, with a > demanding full time job? You should be fine if you have 15-20 hrs to spend per week. With your background, you might blast thru Schweser notes, Qbanks and practice exams. Level 1 was not difficult, especially for some with degrees in finance.


excellent post - good luck with III!

Thanks so much! Can someone help me digest this pls? Econ IRP / Fisher / Uncovered IRP: interest - inflation -> Intl Fisher inflation - exchange rate -> relative PPP exchange rate - interest rate -> Uncovered IRP Interest rate - Forward discount/premium -> covered IRP exchange rate - forward discount / premium -> foreign exchange expectations ITs extremely condesed… Many thanks!