Help Required

Please someone answer the following concepts as i want clarification.

  1. if someone acts on the rumour and do the necessary research afterwards on the rumour to do the required due dilegince and research. Acting upon rumour+along with necessary research, is it violation of nonpublic information or is it ok to act upon it

2.In reversal market, i have an understanding that constant mix will perform well but if someone wants to maintain the allocation of money between equities and cash all the time then which will perform well (Constant mix or Buy Hold). I have an understanding that constant mix does not have any floor value so there is a chance that cash value will go to zero?

  1. When you need to find the Volume weighted effective spread, do we subsitute vwap in place of midqoute in the effective spread or we just use the normal effective spread formula and in the end take volume of each trade. i read somewhere that you can subsitute vwap in the formula as reference in place of mid qoute.

4.Why do we always say that spread need to increase of foreign bond in order to eliminated the advantage of foreign bond. Why is it the increase, shouldnt it be decrease because foreign bond is already higher on the spread ?

Agree with above reg 1).

  1. I’m not sure, let’s see if s.o. can clarify this one

  2. I’d say do the normal Effective Spread and then do the average using volume weighting.

  3. Normally we have a foreign bond having a yield advantage (i.e. higher yield than local bond), so when you find the breakeven spread necessary for that advantage to disappear, it’s gonna be an increase in the rate (which will make the foreign bond to fall)



I agree with what everyone said about ethics for the first one. As for the CM vs. Buy and Hold, I thought I knew this one now i’m not so sure.

No thoughts on this.

Thank you, Yes for point 1 , i had the same oponion but was not sure about it. What about rumour from some friend who work in some other orgainazation.

  1. For point 2, i want some one to clarify me , i faced quite difficulty in this part.

  2. i came across the text in schweser and Circullam that vwap is also used as reference point instead of midqoute. How will we come to know to use which one of these vwap vs midqoute when we need to calculate Volume weighted effective spread … VWAP can also be used because i remember it can also the game for the same reason.

  3. Thanks for the point 4, its typicall bond and interest rate relationship.

  1. Isn’t it just VWAP or TWAP vs. arrival price (i.e. decision price) to determine cost of trade?

totally wrong bud - in both practice and more importantly on the cirriculum that was the basis for the test

If a PM says that he heard that there is a possibility for a takeover offer from another analyst, and then the PM does his homework and acts, you’re saying this is a violation? They way the CFA wrote this question was downright dirty, but I’m honestly curious at this point.

Was his friend an insider?.. this is really tricky

i don’t see any reason to complicate this… if analyst has heard of a rumour and performs necessary research and concludes that this rumour is bound to be true soon based only on his research then there is no breach… he has arrived at a conclusion based on his research and will act on it accordingly

i do agree with most of the comments that rumour is part of marker everyday but in order to have complaince with Law, one needs to do thorough research and dilegence before making any decision. Acting solely on rumour is violation of Due diligence, Responsibilities towards client etc.

You are ALLOWED to make recommendations even while in the posession of material nonpublic research. If you hear of material nonpublic information and then subsequently do sufficient research so that your recommendation is adequately supported using public and nonpublic nonmaterial information you’re not in violation.

In the Curriculum there is one case were an analyst sees two CEO’s having lunch together at a restaurant, discussing the rumored merger between both companies. The Analyst doesnt hear any specifics or their opinions about this. Goes back, does his research, concludes that an M&A would be likely and releases his buy recommendation on the takeover candidate. He was not in violation, if I recall correctly.

I don’t recall the specifics of the question here, and don’t recall my answer to it; so not sure if the mosaic theory applies. My gut feeling tells me if the information was material, so beyond a rumor, then its a violation no matter how thorow the subsequent analysis is. If you turn this around: anyone in possession of material non-public information could write a well researched report justifying why he believes that this could be a good stock to purchase and then advise friends and family to buy call options on the stock.

That roumor caused others to act on it…it should be kept in mind… and it was not public neither nonmaterial…

Mr. Smart to the white courtesy phone. We’ve got another q the board is split on…

Ms. Irony to the rose shi**y phone. We should shut someone up!

Conclusion of this topic:

Those who think

-point 1 is a violation

-Point 2 is CM instead of B&H

-Have messed-up point 3 by doing rocket-science

-Stated “decrease in rate” for point 4,

Better think of re-taking strategy already!!!

So you should think of retaking since you think point 1 is a violation?

  1. Not a violation. Even if the information was a non-public material fact, doing the research based on it is not a violation either.

  2. BH is better for bear markets, because of a floor.

  3. No idea, don’t remember that topic now. I’d take the volume weighted average of trades using mid-quotes to be safe, but the VWAP quote spread could be equivalent mathematically. Actually, it should be, if you take the VWAP as reference price, and the VWAEP as your execution.

  4. If you are holding the bond, a spread widening would garner capital losses on paper, wiping out your inital advantage at that point in time.