So I’ve taken a lot from this board and haven’t given much in return. It’s not that I don’t want to, but basically I feel inadequate to do so. To use an analogy, I’m a poor swimmer in over my head and trying to stay afloat. I see others looking for help, but I’m afraid if I do so I’ll probably just take them down with me. So I let the stronger swimmers do the work and maybe even tag on a bit. However, I’m pretty good at regurgitating things I’ve just read, so I thought of a way I might help. Each day from here on out I plan on reading at least some of the Secret Sauce (which is amazing and everyone should have it). Each day I will make a short post on this thread with a quick hit I’ve learned from the Sauce that day, that just might make a good exam question. Hopefully it will help someone, but even if nobody reads this at least I’ve appeased my conscience. Without further ado, today’s sauce: For all 3 types of hedges (fair value, cash flow & net ivestment of foreign sub), any amount of the hedge that is uneffective (hedge changes more or less than whatever it’s hedging) is recognized on the income statement.
Good idea ng30. Thanks for the effort.
I feel exactly as Ng30 does. I feel inadequate to help and thats why I don’t answer a lot of the questions. I will say this though, the secret sauce is a great investment.
The sauce is being delivered tomorrow morning for me.
Brilliant idea - ng30 !! You have brought up a very good point on uneffective portion of hedges - I missed one question in QBank and can never forget that point now.
But when is it recognized? Tha’ts what threw me. For example, a cash flow hedge is used because gold needs to be purchased in May for goods to be sold in Sept, the gain/loss on the hedge is not recognized in May, but rather in September
i would say when the goods are actually sold which is September. May is when you purchase the gold and you would not know the gain/loss until delivery. can someone confirm? please
guess the response can be today’s sauce: The recognition you’re referring to would be that of the effective portion of the hedge. Recognition: fair value - G/L recognized in income statement cash flow - G/L reported in equity, and eventually recognized on inc. stmt. once the anticipated transaction hits earnings. net investment - G/L recognized in equity along w/ tranlation G/L. In terms of the uneffective portion, the “when” recognized in the inc. stmt. is just as of the statement date
For cash flow hedge, I think its recognized when the product is consumed or the delivery date - anytime before that the G/L is reported in the equity section.
The 2 most important factors in credit analysis of a corporate issuer are the capacity to pay (esp. a cash flow analysis) and the corporate governance structure, which requires analysis of the issuer’s operational risk.
There is an inverse relationship btw. the prepayment risk of planned amortization class (PAC) and support tranches of a CMO, which means the certainty of the PAC bond cash flows comes at the expense of increased risk to the support tranches.
Futures terminology: backwardation: futures price < spot price contango: futures price > spot price normal backwardation: futures price < expected spot price normal contango: futures price > expected spot price
Portfolio management: Liquidity related constraints are tightly linked to risk/return objectives b/c liquidity needs will influence the ability to take risk, as well as reduce expected return objectives.
Keep it going ng. I am subscribed to your daily RSS feed!
This is great. Thanks, ng30.
guys, so sorry to let you down and not post the last couple. i just focused on practice exams this weekend, so now i owe you 3. #1: Quant: 6 common model misspecifications: omitting a variable, transforming variable, incorrectly pooling data, using lagged dependent variable as independent variable, forecasting the past, and measuring independent variables with error
#2 - Most investment data reflect trends and are best suited to the log-linear model, which is best for a data series exhibiting a trend or for which the residuals are correlated or predictable, or the mean is non-constant. Any exponential growth data or data w/ seasonality also calls for a log-linear model.
#3 - Autoregressive models are usually used when a variable consistently increases or decreases over time, and one is specified correctly if the autocorrelations of residuals is insignificant (test using t-test, not Durbin-Watson for AR model)
Key point there^. Cant use DW to test for autocorrelations with an autoregressive model. Could be a trap.
Regression using 2 times series: -if both time series are covariance stationary, model is reliable -if only dependent or independent variable time series is cov. stationary, model not reliable -if neither is cov. stationary, need to check for cointegration