l 2 formula sheet june 2016
TRANSCRIPT
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FinQuiz Formula Sheet CFA Level II 2016
Reading 9: Correlation & Regression
1. Sample "#$ %&' ( )*+) ,*+,
-*./
0+1
2.
Correlation Coefficient = 2), ( 34567896:897: or
2 ( 3458)&,:
5;
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Reading 11: Time Series Analysis
1. Linear Trend Models = yt = b0 + b1t+ !t
• Predicted/fitted value of yt in period
(T + 1) = )1(ˆˆˆ 101 ++=+ T bb yt
2. Log-Linear Trend Models = yt = eb0+b
1t
3. Autoregressive Time-Series Models:
• First order autoregressive AR (1) = xt
= b0 + b1 x t-1 + !t
• pth-order autoregressive AR (p) = xt
= b0 + b1 x t-1 + b2 x t-2 + …..+ b p x t-p
+!t
4. Mean reverting level of
1
0
1 b
b x
t
!
=
5. Chain Rule of Forecasting:
• One-period ahead forecast =
ˆ xt +1
= b̂
0 +
b̂1 x
t
• Two-period ahead forecast=
ˆ xt +2
= b̂
0 +
b̂1 x
t +1
6. Random Walks and Unit Roots:
• Random Walk without drift = xt = x t-
1 + !t where, b0 = 0 and b1 = 1.
• Correcting Random Walk = yt = xt - x
t-1
• Random walk with a drift = x t = b0 + x
t-1 + !t where, b0 # 0 and b1 = 1
• By taking first difference yt = xt - x t-1
= b0 + !t
7. Using Dickey-Fuller Test = xt - x t-1 = b0 +
(b1 -1) x t-1 + !t
8.
Smoothing Past Values with n-Period
Moving Average =
n
x x x xnt t t t )1(21 ..... !!!! ++++
9. Correcting Seasonality in Time Series
Models:
• For quarterly data = x t = b0 + b1x t-1 +
b2x t-4 + !t
• For monthly data = xt = b0 + b1x t-1 +
b2x t-12 + !t
10. ARCH model =
t t t µ ! " " ! ++= #1
2
10
2ˆˆ where
t µ is
an error term
• Predicting variance of errors in period
t+1 = !̂ 2
t t +1 = "̂
0 +"
1 #̂
2
t
Reading 12: Excerpt from ‘Probabilistic
Approaches , Scenario Analysis, Decision Tree
& Simulations’
Reading 13: Currency Exchange Rates
1.
Bid-offer Spread = Offer price – Bid price
2. €F@ 2=J ( Q‚#= ƒ„…GEKJ 2=J r
†4
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FinQuiz Formula Sheet CFA Level II 2016
• For one year horizon =
F f /d ! S f /d =
S f /d i f ! id 1+ i
d
"
#
$%
&
' ( S f /d (i f ! id )
• Using day count convention:
F f /d ! S f /d = S f /d
Actual
360
"
#$%
&'
1+ id Actual
360
"
#$%
&'
(
)
****
+
,
----
(i f ! id )
7. Forward discount or premium as % of spot
rate:
)(/
//
d f d f
d f d f ii
S
S F !"
!
•
If uncovered interest rate parity holds
=
F f /d
! S f /d
S f /d
=%"S e
f /d # (i f ! id )
8. Purchasing Power parity (PPP)
• Pf = S f/d % Pd
• S f/d = Pf / Pd
9.
Relative version of PPP = %'S f/d = (f – (d
10. Ex ante version of PPP = %'Sef/d = (ef –
(ed
11. Real Exchange Rate
qf/d =!!
"
#
$$
%
&=
!!
"
#
$$
%
&
f
d d f
f
d d f
P
P S
P
P S /
/
or!!
"
#
$$
%
&=
f
d d f d f
CPI
CPI S q
//
12. Fisher effect:
•
id = r d + (!
d • if = r f + (
!f
• if – id = (r f – r d) + ((!f - (
!d)
• (r f – r d) = (if – id) - ((!f - (
!d)
13. When both uncovered interest rate parity
and ex-ante PPP hold:
• (r f – r d) = %' S!f/d - %' S
!f/d = 0
• International Fisher Effect: if – id = (!f -
(!d
14. When all the key international parity
conditions are held at all times:
BOP = Current A/C + Capital A/C +
Official Reserve A/C = 0
15.
Real exchange rate = “” = “”
r
q– H q— H ˜– H ˜—
16. Interest Rate Differentials, Carry Trades
and Exchange Rates
q L/ H
= q L/ H
+ (i H
! i L
)! (! " H
!! " L
)! (# H
!# L
)
17. Policy Rate under Taylor rule:
• i = rn +! +" (! ! ! *)+# ( y! y*
• Neutral real policy rate + Current inf
rate + ) (Inf gap) + * (Output gap)
18. Exchange rates using the Taylor Rule =
™šS›‹RšV ( ™šS›‹RšV r 20Rš H 20
šS r
œ Ršž ŸRš H šS H ŸšS r
¡Rš H ¡ ŸRš H ¡šS H ¡ ŸšS H
¢Rš H ¢šS
Reading 14: Economic Growth & The
Investment Decision
1.
Economic growth = Annual % ' in real
GDP or in real per capita GDP
2. P = GDP R£›¤
¤R
3. Expressing in terms of logarithmic rates:
• (1/T) % 'P = (1/T) % 'GDP + (1/T)
%' (E / GDP) + (1/T) % '(P / E)
• % ' in stock MV = % ' in GDP + %
' in share of earnings (profit) in GDP
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FinQuiz Formula Sheet CFA Level II 2016
+ % ' in the price-to-earnings
multiple
4. A two-factor aggregate production
function: Y = AF (K, L)
5. Cobb-Douglas Production Function = F
(K, L) = K ) L1 - )
6. Under the Cobb-Douglas production
function:
• Marginal product of capital = MPK =
) AK )-1 L 1-) = ) Y/K
• ) Y/K = r!) = r (K) / Y = Capital
income / Output or GDP
7. Output per worker or Average labor
productivity (Y/L or y):
• GDP/Labor input = TFP % capital-to-
labor ratio % share of capital in GDP
• Or y = Y/L = Ak )
8. Contribution of Capital Deepening = Labor
productivity growth rate – TFP
9.
Contribution of Improvement intechnology = Labor productivity growth
rate – Capital Deepening
10. Growth Accounting based on Solow
Approach = 'Y /Y = 'A / A + ) 'K/K +
(1 – )) 'L/ L
11. Labor productivity growth accounting
equation
• Growth rate in potential GDP = LT g
rate of labor force + LT g rate in labor
productivity
12. Balanced or Steady State Rate of Growth
in Neoclassical Growth Theory:
• Growth in physical capital stock = 'K
= sY – +K
13.
In the steady state:
• Growth rate of capital per worker = 'k
/ k = 'y / y = 'A / A + ) 'k / k =¥¦§
1+ ¨! Steady state growth rate of
labor productivity
• Growth rate of Total output = 'Y / Y
= Growth rate of TFP scaled by labor
force share + Growth rate in the labor
force =©
1+ ¨ + n
• Steady state Output-to-capital ratio =ª
«=
1
¬
©
1+ ¨ r r _ ( ®
• Gross investment per worker =©
1+ ¨ r r _ ]
• Slope of straight line = [+ + n + , / (1
– ))]14. During the transition to the steady state
growth path:
• Growth rates of output per capita = 'y
/ y =©
1+ ¨ r ¯°
ª
« H ® (
©
1+¨ + ¯° (y/k – -)
• Capital-to-labor ratio = 'k / k =©
1+ ¨ r °
ª
« H ® (
©
1+¨ + s
(y/k – -)
15.
Proportional impact of the saving ratechange on the capital-to-labor ratio and per
capita income over time:
•
k new
k old
=
Y
K
!
"#
$
%&new
Y
K
!
"#
$
%&old
'
(
))))
*
+
,,,,
1
! -1
•
!
"#
$%&
'=
old
new
old
new
k
k
y
y
16. Production function in the endogenous
growth model = ye = f (k e) = ck e
• Growth rate of output per capita =
'ye/ye = 'k e/k e = sc – + – n
Reading 15: Economics of Regulation
Reading 16: Inventories: Implications for
Financial Statements & Ratios
1. End. Inventory = Beg. inventory +
purchases – COGS
2. ±²" ‚J2 DEA= (U4Š;³ 349Š 4m 44ˆ9 ;5;y³;´³ m4< 9;³
U4Š;³ µ0yŠ9 ;5;y³;´³ m4< 9;³
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FinQuiz Formula Sheet CFA Level II 2016
3. LIFO Reserve = FIFO Inventory – LIFO
Inventory
4. FIFO COGS = LIFO COGS – ¶_· in LIFOreserve= LIFO COGS – (End LIFO
Reserve – Beg LIFO reserve)
5. N.I (FIFO) = Net Income (LIFO) + [¸ inLIFO reserve % (1 – tax rate)]
6. R.E (FIFO) = R.E (LIFO) + [LIFO reserve
% (1 – tax rate)]
7. Tax liability (FIFO) = Tax liability (LIFO)
+ (LIFO reserve % tax rate)
8. Cumulative amount of Income Tax savings
using the LIFO method e.g. in year 2015=
(LIFO Reserve at end of 2015 % tax rate in
2015)
9. Amount added to R.E e.g. in year 2015, if
FIFO method is used instead of LIFO
method = [LIFO Reserve at end of 2015 %
(1 - tax rate in 2015)]
10. To convert B.S to FIFO:
• Inventory is increased by LIFO
Reserve.
• Cash is decreased by (LIFO Reserve %
Tax rate %).
• Shareholders’ equity (R.E) is
increased by [LIFO Reserve % (1 – tax
rate %)]
11. Inventory Turnover Ratio =¹49Š 4m 44ˆ9 94³ˆ
º5
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6. Adjusted EBITDA=Adj EBIT + dep exp +
amort. Exp. or Adj. EBITDA= EBITDA
(as reported)
7.
Adj. Operating CF =Reported operating
CF – cap int
8. Adj. Investing CF=Reported investing CF
+ cap int
Depreciation:
9.
ÇJ‚ ƒ„‚ ( È
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Reading 18: Interoperate Investments
1. Summary of Accounting Treatment of Investments
Income Statement (I.S) Balance Sheet (B.S) Statement
ofSH’sEq
uity
Held-to-
maturity
" i income = Market rate at purchase % Initial fair value (FV) of a
debt security
Or i income = i pmt – Amort
i pmt = (Coupon rate % Par value)
Amort = i pmt – i income
"
If debt security is sold: Realized g/l reported on I.S = SP – CV or
Amort cost
" Initially, at FV (IFRS) or initial price paid (US
GAAP)
" Subsequently, reported at amort cost at the
subsequent reporting date on B.S.
N/A
Held
for
tradingsecurity
"
i income = Market rate % Initial FV
" Unrealized g/l = FV at the end of Yr t – Amort Cost at end of Yr t
If debt security is sold:" Realized g/l reported on I.S= SP – Recorded FV
" Initially, at FV.
" Subsequently, at FV at subsequent reporting date
on B.S.
Designated
at
fair value
" i income = Market rate at purchase % Initial FV
"
Unrealized g/l = FV at the end of Yr t – Amortized Cost at end of
Yr t
If debt security is sold:
" Realized g/l reported on I.S= SP – Recorded FV
" Reported at FV at the end of Yr t
"
Subsequently, at FV at the subsequent reporting
date on B.S
Available
-for-sale
" i income = Market rate at purchase % Initial Fv
If debt security is sold:
" Cumulative unrealized g/l is removed from OCI and entire g/l
recognized in P&l statement.
Where, Realized g/l in I.S = (SP – Recorded FV) + Unrealized g/l
" Reported at FV at the end of Yr t
" Subsequently, at FV at the subsequent reporting
date on the B.S.
Unrealized g/l (net
of tax) = FV at end
of Yr t – Amort Cost
at end of Yr t
• Unrealized g/l
(net of tax) is
reported as OCI
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FinQuiz Formula Sheet CFA Level II 2016
5. Downstream Transactions
Investor’s share of Associate’s
reported NI (% of Ownership Interest
% Reported NI)
xxx
Less: Amort of excess PP (xxx)
Less: Unrealized profit (% of
Ownership Interest % Profit from the
downstream sale in Associate’s NI)
(xxx)
= Equity Income to be reported as a
line item on Investor’s I.S
xxx
Unrealized profit = % of goods unsold % Profit
on the sale to investee
Investor’s share of the unrealized profit =
Unrealized profit % % of goods unsold
Investor’s share of associate’s
reported NI (% of Ownership Interest
% Reported NI)
xxx
Less: Amort of excess PP (xxx)
Add: Realized profit (% of goods
unsold % Unrealized profit)
xxx
= Equity Income to be reported as a
line item on Investor’s I.S
xxx
Business Combinations6. Merger = Company X + Company Y
= Company X
7. Acquisition = Company X + Company Y =
(Company X + Company Y)
8. Consolidation = Company X + Company
Y = Company Z
Goodwill
9. Full Goodwill = Total FV of the
Subsidiary – FV of subsidiary’s
identifiable net assets
10.
Partial Goodwill Method:
• Goodwill = FV of acquisition –
Acquirer’s share of FV of all
identifiable tangible and intangible
assets, liabilities and contingent
liabilities acquired
Or
• Goodwill = Purchase price – parent’s
(acquirer’s) proportionate share of the
FV of subsidiary’s identifiable net
assets.
11. Under Acquisition method, the allocation
of PP:
FV of the stock issued xxx
Add: BV of Investee’s net assets xxx
= Excess PP xxx
FV of the stock issued xxx
Less: FV allocated to identifiable net
assets
(xxx)
= Goodwill xxx
12. Allocation of excess PP: Excess PPP =
Sum of diff b/w FV and BV of identifiable
assets + Goodwill
13. Combined Assets & Liabilities (A&L)
reported on Consolidated B.S under
acquisition method: Consolidated B.S
under acquisition method = BV for A&L
of Investor + FV for A&L acquired from
Acquiree
14.
Combined Paid-in Capital (PIC) = (FV of
the stock issued to effect the transaction –
Par value of the stock issued) + Additional
PIC of investor
15. Minority Interest = % of subsidiary not
owned by the Parent % Subsidiary’s Equity
16. Value of non-controlling interest under full
goodwill method = Non-controlling
interest’s proportionate interest in
subsidiary % FV of subsidiary onacquisition date
17. Value of non-controlling interest under
partial goodwill method = Non-controlling
interest’s proportionate interest in
subsidiary % FVof the subsidiary’s
identifiable net assets on acquisition date
Goodwill Impairment:
18. Goodwill Impairment Test under IFRS:
•
Impaired when CA of the Cash-generating
Unit > RA of the Cash-generating Unit
• Impairment loss = CA of Cash-generating
Unit - RA of Cash-generating Unit where,
RA = Higher of Net SP and its VIU
Net SP = FV – costs to sell
VIU = PV of expected future CF of
cash-generating unit
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FinQuiz Formula Sheet CFA Level II 2016
19. Goodwill Impairment Test under U.S.
GAAP (Two Step Approach)
• Step 1: Goodwill Impairment Test
• Impaired when CV of Reporting Unit
(including Goodwill) > FV of
Reporting Unit (including Goodwill).
• Step 2: Measurement of Impairment
loss = CV of Reporting unit’s
Goodwill - Implied FV of Reporting
unit’s Goodwill
• Where Implied FV of Reporting unit’s
Goodwill = FV of Reporting Unit –
FV of Reporting unit’s net assets
Reading 19: Employee Compensation: PostEmployment & Share-Based
1. Under DC Plans: Pension exp = Co.’s
annual contribution to plans adjusted for ¸ in yr-end accruals
2. Funded Status = PV of DB obligations –
FV of plan assets
3.
Period pension cost of a Co.’s DB pension
plan = ¸ in Net pension liability or assetadjusted for employer’s contributions
4. Net i exp = Discount rate % Net Pension
liability
where Discount Rate = rate used to
calculate PV of future pension benefits
5. Net i income = Discount rate % Net
Pension asset
6. Net return on plan assets = Actual return
on plan assets – (Plan assets % i rate)
7. Actuarial g/l = Actual return – (Plan assets
% Expected return)
8. Total Periodic Pension Costs =Sum of
components of periodic pension costs
• Total periodic pension cost in a given
period = ¸in Net pension liability or
asset adjusted for employercontributions
• Total Net periodic pension cost (End
Funded Status* – Beg Funded Status*)
– Employer Contribution
where *Pension liability is treated as a
negative
9. Adjusted Total P&L pension exp (income)
• = Current service costs + i costs + (-)
actuarial losses (actuarial gains) + past
service costs (or plan amendments) –
(+) Actual return (loss) on plan assets
Or
• = Reported Total P&L pension exp
(income) + Expected return on plan
assets – Actual return on plan assets
10. Adjusted Pre-tax Income:
• = Reported Pre-tax income + (Actual
return on plan assets – Expected return
on plan assets)
Or
• = Reported Pre-tax income + Total
reported pension and other post-
retirement benefits - Current service
costs - i exp component of pension
cost + Actual return on plan assets
11. Adjusted Net Operating Exp=Reported Net
operating exp – Total reported pension and
other post-retirement benefits + Current
service costs
12. Adjusted i Exp. = Reported i exp. + i exp.
component of pension cost
13. Adjusted i and investment Income
=Reported i and investment income +
Actual return on plan assets
14. Compensation exp. = FV of stock on the
Grant Date
16. "#N‚JEB=A#E J„‚ 2J…#KEAÎJ@ (
š0
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FinQuiz Formula Sheet CFA Level II 2016
Reading 20: Multinational Operations
1. Cumulative Translation Adjustment = CTA = Assets – Liabilities –
Common Stock – Retained Earnings
2.
Balance Sheet Exposure:Foreign Currency (FC)
B.S Exposure Strengthens Weakens
When assets translated atcurrent X rate > liabilitiestranslated at current X rate
Net Asset B.Sexposure
+vetranslation
adj
-vetranslation
adj
When liabilities translated atcurrent X rate > assetstranslated at current X rate
Net Liability B.Sexposure
-vetranslation
adj
+vetranslation
Adj
(X = exchange)
3. Re-measurement Gain = NI . NI before re-measurement gain
4. Re-measurement Loss = NI . NI before Re-measurement loss
5.
Rules For Translation Of A Foreign Subsidiary’s FC Financial
Statements (F.Ss) Into Parent’s Presentation Currency Under IFRS &
U.S. GAAP
Foreign Subsidiary’s Functional Currency
FC Parent’s PresentationCurrency
Translation Method: Current Ratemethod
Temporal Method
X rate at which F.Ss are
translated from foreignsubsidiary’s bookkeepingcurrency to parent’s
presentation currency.
ASSETS Monetary assets: Cash, a/creceivables
Nonmonetary Assets:i) Measured at current valuei.e. marketable securities &inventories measured at
Current rate
Current rate
Current rate
Current rate
Foreign Subsidiary’s Functional Currency
FC Parent’s PresentationCurrency
market value under the lowerof cost or market rule.ii) Measured at historical
costs e.g. PP&E
Current rate Historical rate
LIABILITIES
Monetary liabilities: a/c payable, LT debt, accruedexp., and deferred incometaxes.
Nonmonetary liabilities:i) measured at current valueii) not measured at currentvalue i.e. deferred revenue
Current rate
Current rate
Current rate
Current rate
Current rate
Historical rate
EQUITYOther than R.E i.e. CommonStock
Retained Earnings (R.E)
Historical rates
Beg R.E +
translated NI – div.translated at
historical rate
Historical rates
Beg R.E + translated NI –
div. translated at historicalrate
Revenues Average rate Average rate
EXPENSES Most Expenses
Expenses related to assetstranslated at historical X rate
e.g. COGS, Dep.,& Amort. etc.
Average rate
Average rate
Average rate
Historical rate
NI Average rate Mixed (a mix of averagerate & historical rate)
Exposure Net Assets or NetLiabilities
Net monetary assets or Netmonetary liabilities
Treatment of translation adj.in parent’s consolidated F.Ss
Accumulated as aseparate component
of equity
Included as g/l in NI
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FinQuiz Formula Sheet CFA Level II 2016
TEMPORAL METHOD: CURRENTRATE
METHOD Net MonetaryLiability Exposure
Net MonetaryAsset Exposure
FCstrengthens
relative to parent’s presentation
currency
" Rev Ð " Assets Ð
"
Liabilities Ð
" NI Ñ " SH’ equity Ñ " Translation
loss
" Rev Ð " Assets Ð
"
Liabilities Ð
" NI Ð " SH’ equity Ð " Translation
gain
" Rev Ð " Assets Ð
"
Liabilities Ð
" NI Ð " SH’ equity
Ð " +ve
Translationadj.
FC weakensrelative to parent’s
presentationcurrency
" Rev Ñ " Assets Ñ "
Liabilities Ñ
" NI Ð " SH’ equity Ð " Translation
gain
" Rev Ñ " Assets Ñ "
Liabilities Ñ
" NI Ñ " SH’ equity Ñ " Translation
loss
" Rev Ñ " Assets Ñ "
Liabilities Ñ
"
Net Income
Ñ " SH’ equity Ñ
"
-veTranslationadj.
6. Impact of Changing Exchange Rates on Exposure
Foreign Currency
Strengthens Weakens
CURRENT RATE METHOD: Net Assets Net Liabilities
GainLoss
LossGain
TEMPORAL METHOD: Net Monetary Assets Net Monetary Liabilities
GainLoss
LossGain
Hyperinflationary Economy
7. Restatement Factor =¹µ
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Reading 21: Evaluating Quality of Financial
Reports
1. DSR (days sales receivable index) =
(Receivablest/Salest) / (Receivablest–
1/Salest–1)
2. GMI (gross margin index) = Gross
margint–1 / Gross margint
3. AQI (asset quality index) = [1 – (PP&E t+
CAt)/TAt ] / [1 – (PP&Et–1+ CAt-1)/TAt-1]
4. SGI (sales growth index) = Salest/Salest–1
5.
DEPI (depreciation index) = Dep ratet– 1/Dep ratet
where, Dep rate = Dep/(Dep + PP&E)
6.
SGAI (sales, general, and admin exp
index) = (SGAt/Salest) / (SGAt–1/Salest–1)
7. Accruals = (Income before extraordinary
items – Cash from operations)/TA
8. LEVI (leverage index) = Leveraget /
Leveraget–1 where, Leverage = Debt /
Assets
9.
Earnings t+1 = ) + (*1 % Earnings t) + !
10. Account receivable turnover = (365/DSO)
11. Z-score = `LI ɼŠ Ò¹
Uº + `LÓ É
VLR
Uº +
ÔLÔ ÉRÁ»U
Uº + ÕLÖ É
×LØ 4m RÀµyŠP
ÁLØ 4m ³y;´y³yŠy9 +
`LÕ ÉS;³9
ULº
Reading 22: Integration of Financial Statement
Analysis
1. DuPont Analysis:
• ROE = Tax Burden % Interest
Burden % EBIT margin % TATO %
Financial Leverage
• ROE = NI/EBT % EBT/EBIT %
EBIT/Sales % Sales/Assets %
Assets/Equity
•
ROE = Net profit margin % asset
turnover % leverage
• Adjusted Asset base = Adjusted Total
Assets = Total Assets of the company
– Investments in Associates
• Adjusted NI = NI of Co – NI from
Associates
• ²@ÂDB=J@ Ù„ ÊD2@JE (¼»+RÀµyŠP y034½
RÁU
•
²@ÂDB=J@ Ù²ÙÚ (ÛÜÝÞÜß àákÞÜß âãLä-Ýåæç-æLèâ-‘ àákâ-‘ âãLä-Ýåæç-æ
>
Accruals and Earnings Quality
2. B.S based aggregate accruals
• Aggregate Accrualst = NOAt – NOAt-1
where, NOAt = Net operating Assets t
= Op Assets t – Op Liab t = [{TA t –
(Cash t + ST invstmnt. t)} – {Total liab
t – (Total LT debt t + Debt in current
liab.)}]
• ÊL Q CBJ@ ²……2DÌB é=A# (¼Èº~+¼Èº~k/
¼Èº~’¼Èº~k/>
3. CF based aggregate accruals:
• Aggregate Accruals = NI t – (CFO t +
CFI t)
• "€ CBJ@ ²……2DÌB é=A# (¼»æ+8¹†Èæ’¹†»æ:
8¼Èºæ’¼Èºæk/:>
• Op. CF before interest and taxes = Op.
CF + cash i paid + cash taxes paid
• Op income adjusted for accounting ¸
= Profit before i& taxes + amort. ofgoodwill
4. "BG éJ=D2E #E ²BBJ=B ( ȉL¹†
º5 ULº
5. Cash Flow to Reinvestment =ȉL¹†
3;‰yŠ;³ O‰0ˆyŠµ
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FinQuiz Formula Sheet CFA Level II 2016
9. Parent Co. pro-rata share of
subsidiary/affiliates = (Subsidiary’s share
price in FC% Shares held by Parent Co. %
X- rate)/Parent Co. total market
capitalization
10. Implied Value of Parent Co. (excl.
subsidiary/affiliates) = Parent Co.’s Mkt
Cap - Value of subsidiary/affiliate holdings
11. P/E ratio of Parent Co =¤;
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FinQuiz Formula Sheet CFA Level II 2016
• Total value of Co. = NPV (PV of RI)
+ Original Equity investment +
Original Debt investment
Claims Valuation
17.
Total value of Co. = value of liabilities +
value of equity
Reading 24: Capital Structure
1. ±²"" ( 2Òº¹¹ ( ›
Ø É2ˆÉ ` H = r
R
Ø É2
2. Total value of Co. = V = D + E
3. WACC without taxes = 2Òº¹¹ (›
ØÉ2ˆ r
R
ØÉ2
4. "#B= #M ƒ™DA=¡ ( 2 ( 2u r 82u H 2ˆ:›
R
5.
Ë ( Ç r ƒ ( »0Š
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FinQuiz Formula Sheet CFA Level II 2016
Payout Policies:
7. Stable Div. Policy
• Expected Ð in Div. = Ð in Earnings % Target payout ratio % Adj. factor
• Adj. factor = 1/no. of yrs. over which
adj. in div. will take place
• Expected Div = Last div. + (Expected
Ð in earnings % Target payout ratio % Adj. factor)
8.
Residual Div. Policy
• Div. = Earnings – (Capital budget %
Equity % in capital structure) or
• Div. = Zero, whichever is greater.
9.
Div. Payout Ratio =›y5L
¼»
10. Div. Coverage Ratio =¼»
›y5L
11. FCFE Coverage Ratio =†¹†R
÷›y5L’SŽ;
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FinQuiz Formula Sheet CFA Level II 2016
• When takeover premium is given in
%, Estimated takeover price of Target
= (Estimated stock price of Target
based on Comparables) % (1 +
Takeover premium in %)
18. Target Shareholders’ gain = Premium = P T
– V T
where,
P T = price paid for target company
V T = pre-merger value of target
company
19.
Acquirer’s gain = Synergies – Premium =
S – (P T – V T)
20. Post-merger value of the combined
company = V A* = V A + V T + S – C
where,
V A = pre-merger value of the acquirer
C = cash paid to target SH i.e. cash paid =
cash price paid per share of target co. % no.
of shares outstanding of target co.
21. In Stock offer = P T = (N % P AT)
where,
P T = price paid for target co.
N = No. of new shares target receives
P AT = price per share of combined firm
after merger announcement
Reading 29: Equity Valuation: Applications &
Processes
1. Mispricing = VE – P = (V- P) + (VE –
V)
• VE –P: Mispricing
• V–P: True Mispricing
• VE –V: Valuation Error
where,VE = estimated value
P = market price
V = intrinsic value
2. Residual Income Model = NI – (cost of
equity % Beg value Equity)
Reading 30: Return Concepts
1. Dividend yield or investment income =
(DH/P0)
2. Price appreciation R = (PH-P0)/P0
3. HPR = r = {(DH + PH) / P0} – 1 OR r =
{(P1 – P0+CF1) / P0
4.
Expected Alpha = Exp. R – Req. R
5. Realized Alpha (Ex-post alpha) = (Actual
HPR) – (Contemporaneous Req. R)
6.
Expected HPR:
• When an asset’s intrinsic value #
market price, the investor expects to
earn = RR + return from the
convergence of price to value
• When an asset’s intrinsic value =
price, the investor expects to earn RR
only.
• E (R T) & r T + {(V0 – P0) / P0}
where,r T = periodic required RoR,
• {(V0 – P0)/P0} = estimate of return
from convergence over period
7.
IRR:
• Intrinsic value= D1 / (k-g)
• If asset (fairly priced), market price =
intrinsic value: k = (D1 / P0) + g
8. Req ROE = R f + ERP
9. GGM Intrinsic value = D1/ (k-g)
Macroeconomic Model Estimates (Supply side
models):
10.
ERP = [{(1+EINFL) (1+EGREPS)
(1+EGPE)-1} +EINC]-Expected R f R
• where EINFL= expected inf.(
forecasted as) {(1+YTM of 20-yr T-
bonds) / (1+YTM of 20-yr TIPS)} –
1.
• EGREPS = expected growth rate in
real EPS.
•
Real GDP growth rate = labor productivity growth + labor supply
growth rate
Labor supply growth rate = population
growth rate + increase in labor force
participation rate
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FinQuiz Formula Sheet CFA Level II 2016
• EGPE = expected growth rate in P/E
ratio. (For efficient markets 1+EGPE
= 1+0 = 1.
• EINC = expected income component
(includes dividend yield &
reinvestment R)
11. CAPM: Required Return on share i =
Current expected Rf R + Bi (ERP)
• where ERP = Expected R on mkt
portfolio – R F R
• Beta = Cov of returns with mkt R /mkt
portfolio var.
12. Adjusted Beta = (2/3) (Unadjusted beta) +
(1/3) (1.0)
13.
Beta Estimation for Thinly Traded Stocks
and Nonpublic Companies
• Bu & [1/ {1+ (D/E)}] %Be
• Be’ & [1+ (D’/E’)] %Bu
14. Multifactor Models = r = R f + (RP)1 +
(RP)2 + … + (RP)k
• RPi = (Factor sensitivity)i % (Factor
RP)i.
15. The Fama-French Model (FFM): r i =R f +
Bimarket% RMRF + Bi
size% SMB + Bivalue %
HML
• RMRF = R M –R f
• SMB(small minus big) = Avg. R on 3
small-cap portfolios – avg. R on 3
large-cap portfolios.
• HML (high minus low) = Avg. R on 2
high Book-to-market portfolios – avg.
R on 2 low book-to-market portfolios.
16. Pastor-Stambaugh Model (PSM): r i = R f +
Bimarket
%RMRF + Bisize% SMB + Bi
value %
HML+ BiLiq% LIQ
17. 5-factor BIRR Model: r i = T-bill rate +
(sensitivity to confidence risk % confidence
RP)–(sensitivity to time horizon % time
horizon RP) – (sensitivity to inf. risk % inf.
RP) + (sensitivity to business cycle risk % business cycle RP) + (sensitivity to mkt.
timing risk % mkt. timing RP)
18. Build-Up Approaches for Private Business
Valuation: r i = r f + ERP + Size premi
+Specific Co. premi
19. Bond yield Plus RP (BYPRP) cost of
equity = YTM on the co.’s LT debt + RP
Country Spread Model
20. ERP estimate = ERP for a developed mkt
+ Country prem.
• Country Prem. = yield on emerging
mkt bonds (denominated in currency
of developed market) – yield on
developed mkt. govt. bonds
21. Cost of Capital = WACC = {D/(D+E)}r d
(1-Tax rate) + {E / (D+E)}r E
Reading 31: The five competitive forces that
shape strategy
Reading 32: Your strategy needs a strategy
Reading 33: Industry & company analysis
1. % of sales (specific geographic region) =
Sales of a particular region / Total sales of
a co.
2.
Co.’s projected Rev. growth = Projected
mkt. share % Projected sales of a given
product mkt.
3. Forecasted variable costs = % of rev. Or =
Unit volume % Unit variable costs
4.
COGS =Raw materials + Direct labor +
Overhead (in producing the goods)
5.
Finance costs = (Fixed i rate on debt %
Gross debt at beg. of period) – (i income
rate % cash position at beg of period)
6. Gross debt = LT financial debt + ST
financial debt + Accrued interest
7. Net debt = Gross debt – Cash and cash
equivalents
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FinQuiz Formula Sheet CFA Level II 2016
8. Effective i rate = i exp / Avg gross debt
9. i rate on avg cash position =i income / Avg
cash position
10.
i rate on avg. net debt = Net i exp / Avg.
net debt
11. Deferred tax asset/liability = Profit and
loss (reported) tax amount – Cash tax
amount
12. Projected A/C receivable = Forecasted
annual sales (assuming all credit sales) %
(Assumed DSO/ 365)
13. Projected inventory = Assumed COGS /
Assumed Inventory TO ratio
14.
ROIC= NOPLAT / Invested Capital = EBI
/ (Operating assets – Operating liab.)
15. ROCE = Op. profit / Capital employed (i.e.
debt and equity capital)
16. Rev. loss for co. due to cannibalization of
demand = Projected no. of units of product
cannibalized by the new substitute product
% Estimated ASP
Where,
• Average selling price (ASP) =¹4½‰;0P¿9 9Šy½;Šˆ ;5L
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FinQuiz Formula Sheet CFA Level II 2016
Inventories
Add: Trade and other receivables
Add: Cash & cash equivalents
Add: Other current assets
=Total current assets
Total assets = Total non-current +
Total current assets
Share capital
Add: Share premium
Less: Treasury shares
Add: Consolidated reserves+Net profit
to co. owners
Plus: Translation reserve
+/-: Profit or loss recorded in equity
= Equity attributable to
shareholdersPlus: Non-controlling interest
= Equity
LT financial debt
Add: Provision for employee benefits
Add: LT provisions for liabilities and
charges
Add: Deferred tax liabilities
= Total non-current liabilities
ST financial debt and accrued interest
Add: Trade and other payables
Add: Income tax payable
Add: ST provisions for liabilities and
charges
Add: derivative financial instruments
Add: Liabilities held for sale
= Current liabilities
24.
FCFF:
Normalized operating profit
Less: Taxes
= Normalized operating
profit after tax
Add: Dep. & amort.
¸ in WCLess: Capital expenditures
= FCFF
Reading 34: Discounted dividend valuation
1. Asset’s value is PV of its expected future
CFs i.e. Ëu ( ¹†æ
1’< æ0Š\1
2.
RI = NI – (cost of equity % Beg. BV of
common equity)
3. In RI Model: Value of stock = BVPS at t =
0 + PV of expected future residual
earnings
• where, BVPS = common SHs’ equity /
no. of common shares outstanding
• RI model (assumes Clean Surplus
Accounting holds) i.e. BV t = BVt-1 +
NIt – Divt
4.
DDM• With Single HP = Value of Stock =
PV of expected Div. + PV of expected
Selling Price at the end of year one =
Ëu ( ›/81’
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FinQuiz Formula Sheet CFA Level II 2016
10. Ù2AÌAEK Å‹ƒ 2=A# (¤&R&
(›&81’:
R&8
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FinQuiz Formula Sheet CFA Level II 2016
• Total value of Equity (common) =
Total Firm value – Market value of
Debt – Preferred stock
9. Finding FCFF and FCFE from EBIT or
EBITDA
• FCFF = EBIT (1 – Tax rate) + Dep –
FCInv – WCInv
• FCFF = EBITDA (1 – Tax rate) + Dep
(Tax rate) – FCInv – WCInv
• FCFE = FCFF – Int (1 – Tax rate) +
Net borrowing + issuance of preferred
stocks – redemption of preferred stock
10. Forecasted FCFF = Forecasted [EBIT %(1
– Tax rate) – FCInv – WCInv]
11. Incremental fixed capital expenditures as a
proportion of sales increases =¹;‰yŠ;³ O‰+›‰ O‰
»03
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FinQuiz Formula Sheet CFA Level II 2016
8. Yardeni Model CEY = CBY – (b % LTEG)
+ Residual
where,
CEY = current earnings yield on the mkt.
index i.e. E/P.
CBY = current Moody’s Investors Service
A-rated corporate bond yield.
LTEG = consensus 5-year earnings growth
rate forecast for the mkt index.
b = coefficient (measures weight, the mkt
gives to 5-year earnings projections).
• By taking inverse:¤
R (
1
¹Á,+´ É ¾UR£
9. Own Historical P/E: Justified price =
Benchmark value of own historical P/Es % Most recent EPS
10. Terminal Value (T.V) based on
Fundamentals:
• T.V in yr n = (justified trailing P/E) %
(forecasted earnings in year n)
• T.V in year n = (justified leading P/E)
% (forecasted earnings in year n+1)
11.
Terminal Value based on Comparables:• T.V in yr n = (Benchmark trailing
P/E) % (forecasted earnings in year n)
• T.V in yr n = (Benchmark leading
P/E) % (forecasted earnings in year
n+1)
12.
P/B = ¤
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FinQuiz Formula Sheet CFA Level II 2016
23. Total Invested Capital = TIC = MV of
Common equity + MV of preferred stock +
MV of debt
24.
Earnings surprise UEt = EPS t – E (EPS t)
where,
UEt= unexpected earnings for quarter t
EPSt= reported/actual EPS for quarter
t
E(EPSt) = expected EPS for the
quarter
• Percent Earning Surprise =R;
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FinQuiz Formula Sheet CFA Level II 2016
10. All Risks Yield = ²é' (V0Š
V30Š 9;³9 ‰
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FinQuiz Formula Sheet CFA Level II 2016
"&$ Private market real estate debt
• Loan-to-value = Loan / value of the
property
• Max. loan amount based on LTV ratio
= LTV ratio (in %) % Appraisal value
of property (in $)
• Debt serve coverage ratio = NOI/Debt
service
• Debt service=Interest + Principal
payments on the mortgage.
• Principal payments=Part of the loan
payment that amortizes the loan over
the loan term.
• Max.debt service based on DSCR =
NOI/DSCR
•
When the loan is interest-only,Max.loan amount based on DSCR=
Max. debt service based on DSCR /
Debt interest rate
26. Equity dividend rate or Equity yield rate =
Cash flow / Equity
where, Cash flow = NOI – Debt
Service
Equity = Price – Mortgage
27. Calculating Leveraged IRR:
CF received by the equity investor from
the sale = Sale price – Mortgage balance
PV = – Initial investment
PMT = Cash flow
n = Holding period
FV = Cash flow received from sale
CPT# I/Y! Leveraged IRR.
28. Calculating Unleveraged IRR:
Cash flow received by the equity investor
from the sale = Sale price + NOI in the 1 st
year
PV = – Initial investment
PMT = NOI in the 1st year
n = Holding period
FV = Sale price
CPT# I/Y!Unleveraged IRR.
Reading 40: Publicly traded real estate
securities
1. Rent paid by Tenants = Net rent +
Proportionate share of the common areacosts of the mall (based on space leased)
2. NAVPS = (MV of R.E Co.’s assets – MV
of R.E Co.’s liab.) / # of shares outstanding
3. Appraised value = NOI / Cap rate
4. Estimating NAVPS:
• Pro forma cash NOI = NOI – Non
cash rents* + Adj. for full impact of
acquisitions
• *Non-cash rent = Avg. contractual
rent over the leases’ terms – Cash rent
actually paid.
• Estimated future expected cash NOI =
Pro forma cash NOI + Expected
growth in NOI
• Estimated value of operating real
estate =Estimated future expected cash
NOI / Cap rate
• Estimated gross asset value =
Estimated value of operating real
estate + BV of Cash & equivalents +
BV of Land held for future
development + BV of a/c receivables
+ BV of Prepaid/other assets
• Net asset value = Estimated gross
asset value – Total debt – Other liab.
(but not deferred taxes)
• NAVPS = Net asset value / # of shares
outstanding
5.
P/FFO = Current stock prices / Yr-aheadestimated FFO
• FFO = Net earnings + Dep. Exp. on
R.E + Deferred tax charges – g/l from
sales of property and debt
restructuring + Losses on sales of
property and debt restructuring OR
• FFO = EBITDA – Interest Expense
6. P/AFFO = Current stock prices / Yr-ahead
estimated AFFO
• AFFO = FFO – Non cash rent* –
Recurring Maintenance type Capital
expenditures – Leasing costs (i.e.
leasing agent’s commissions –
Tenants’ improvement allowances)
• *Non-cash rent = Straight-line rent -
Cash rent paid during the period
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FinQuiz Formula Sheet CFA Level II 2016
7. Estimated Value of a REIT Co. in yr N
= (P/FFO of overall REIT group for
yr N) % REIT co.’s expected FFO in yr
N or
= (P/AFFO of overall REIT group for
yr N) % REIT co.’s expected AFFO inyr N
Reading 41: Private equity valuation
1. PIC:
• PIC = Cumulative capital (CC) called
down
• PIC Multiple = PIC / CC
2.
DPI = Sum of distb. / CC called down (orPIC)
3. RVPI = NAV after distb. / CC called down
(or PIC)
4. TVPI = DPI + RVPI
5.
Mgmt. fees = % fee % PIC
6. Carried interest= % % (NAV before distb.
–CC) in year when NAV before distb. Is
first > CC
'()*)+,-)*. /+**0)1 02-)*)3- 4 5 6 789:
;),
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FinQuiz Formula Sheet CFA Level II 2016
Reading 44: The arbitrage free valuation
framework
Reading 45: Valuation & analysis: Bonds with
embedded options
1. Value of callable bond = Value of straight
bond – Value of issuer call option
2.
Value of issuer call option = Value of
straight bond – Value of callable bond
3. Value of putable bond = Value of straight
bond + Value of investor put option
4.
Value of investor put option = Value of
putable bond – Value of straight bond
5. The rate in the up state = R u = R d% e2/ @
where, Rd = Rate in the down state
/ = Interest rate volatility
t = Time in years between “time slices”
6.
Duration (Øk+Øè
>ÉØ&É ¸,
7. Convexity (Øè’Øk+ >ÉØ&
>É Ø&É ¸, ?
8. Effective Duration =¤Øk + ¤Øè
>É ¸¹µÉ §I&
¸Jüû:î ? É §I&
10. Value of capped floater = Value of straight
bond – Value of embedded cap
11. Value of floored floater = Value of straight
bond + Value of embedded floor
Analysis of a Convertible Bond
12.
Conversion Ratio (CR) = No. of shares ofC.stock from exercising call option
13. Conversion Price (or stated conversion
price) = Par value of convertible bond ÷
CR
14. Conversion Value (or Parity) = Market
price of C.stock % CR
15.
Straight Value or Investment Value =Market value of a security without
conversion option
16.
Min. Value of a Convertible Security is
(greater of conversion value or straight
value)
17. Market Conversion Price or Conversion
Parity Price =×;
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FinQuiz Formula Sheet CFA Level II 2016
4. Black-Scholes Option pricing Formula =
S t = A
t N (d
1)! ke
!r(T !1) N (d
2)
Where,
1
)(2
1
)(ln
2
1!
!+
!+
""#
$
%%&
'
=
T
t T t T r K
A
d
t
(
(
d2 = d1 – / Ù H `
5. Value of debt = D (t, T) = PV of payoff on
co.’s debt if default occurs + PV of payoff
on co.’s debt if default does not occur =
)()( 2)1(
1 d N Ked N A T r
t
!!
+!
•
where, N (d2) = Risk neutral probability of the co.’s debt not
defaulting
6. Credit Risk Measures
• Probability of the debt defaulting =
Prob. (AT< K) = 1 – Prob. (AT 1 K) =
1 – N(e2)
Where,
•
t T
t T t T u
K
A
e
t
!
!+!+""#
$
%%&
'
=
(
( )(2
1)(ln 2
1
• e2 = e1 - / Ù H ` 7. Co.’s asset R in CAPM (a static one-period
model):
Co.’s asset R = R f + ! of co.’s asset
(Expected R per year on Mkt. portfolio –
R f )
= R f + (! of co.’s asset % Mkt.’s ERP)
8.
Price of debt{ @& a (
^ «
1’û/¸ 1’û/è¸ D 1’û•è¸
9. Credit risk measures in reduced form
model:
• Default probability over [0,T] = Prob
@ K a ( ̀ H
^ë L M «
1’N L&¸ ’ 1 ’N L¸ D 1’N L•k¸ ¸
•
Expected loss =
ë̂\u¥+¸ ë L M «
1’N L&¸ ’ 1 ’N L¸ D1’N LM ¸
O vZ ¸
• Present value of the expected loss = K
P (t,T) – D (t,T)
10. Historical Estimation
• Probability of default over [t, t+'] =
Prob (t) =!""=
+
N
i
t i
i X b
e 11
1
#
• Parameters estimation:
!=
+="#
$%&
'
(
N
i
t i
i X b
dt
dt
11ln ) Where
dt = {1 if default, 0 if no default}
• To estimate the loss given default:
t(Xt) = !=
+
N
i
i
i t X cc
1
0
Where {ci for i = 1, …, N} are
constants.
11. Price of the coupon bond (assuming no
arbitrage and frictionless markets)
BG (t) = !"
=
++
1
1
),()(),(T
i
T t P F C it CP
12. Credit spread (t) = Avg. yields on risky
zero-coupon bond – Avg. yields on riskless
zero-coupon bond
Or= [Average yields on the risky zero-coupon
bond – Average yields on riskless zero-
coupon bond] + Liquidity premium
or
= Expected % loss per year on the risky
zero-coupon bond + Liquidity Premium
13. PV of expected loss = PV of CF of riskless
debt – PV of CF of risky debt = [P (t,T) –
D (t,T)] XT
Where, XT = Promised CF at T of a risky
Co.
Reading 47: Forward Rate Markets &
Contracts
1. Forward Price = Spot price % (1 + R f )T
F (0, T) = S0 (1 + r)T Or
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FinQuiz Formula Sheet CFA Level II 2016
S0 = F (0, T) / (1 + r)T
2. Value of a forward contract (of long
position)at time t during contract life
(where t
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FinQuiz Formula Sheet CFA Level II 2016
4. R C&C Arbitrage (when the Futures
Contra ct is Underpriced)
5. Pricing Futures Contracts when there are
Storage Costs and/or cash flows on the
Underlying asset and/or convenience
yield
• If holding an underlying asset results
in monetary costs and benefits (net
cost), futures price is:
• If holding an underlying asset results
in non-monetary benefits
(convenience yield), futures price is:
6. Pricing T-Bond futures Contract = F (0, T)
= (S0 – PVC) % (1 + r)T
Or
F (0, T) = [S0 % (1 + r)T] – FVC
7. No-arbitrage price of a Stock index futures
contract = F (0, T) = (S0 – PVD) % (1 + r)T
Or F (0, T) = [S0 % (1 + r)T] – FVD
8.
Futures price as stock index discounted at
dividend yield, compounded at Rf rate:
F (0, T) = [S0 / (1 + +)T] % (1 + r) T
Or F (0, T) = S0 (1 – +*) (1 + r)T
9.
Stock Index Futures Contracts with
Continuous Dividends = F (0,T) =
T r T cc
eeS ! "
0Or
F (0,T) =( )T r cc
eS ! "
0
10. No-arbitrage futures price of a unit of
foreign currency in terms of the home
currency for a currency futures contract of
length T in years = F (0, T) = S0 % [(1+ r)T/ (1 + r f ) T]
11. The continuous time price formulas for
currency futures contracts:
F (0,T) =T r T r c fc
eeS !0
or
( ) T r r fcceS !"!0
Reading 49: Options Markets & Contracts
1.
Put-call parity = c0 +X / (1+R f )T = p0 + S0
• European call (synthetic call) = c0 =
p0 + S0 – X / (1+R f )T
• European put (synthetic put) p0 = c0 -
S0 + X/(1+R f )T
• Synthetic stock position = S0 = c0 – p0
+ X/ (1+R f )T
2.
Delta = hedge ratio = number of shares
purchased per call sold
• No. of stocks per option (D) = (C+ - C-
) / (S+ - S-)
• No. of options per stock = 1/D
• No. of calls to sell = No. of shares
hedged / delta of the call option
• Total shares of stock to purchase =
No. of options short % Delta
The two values of the put at the end of the first
period are
• ŵ ( ‰¤
"" ’ 1+‰ ¤"‘
1’<
• Å̂ ( ‰¤‘"’ 1+‰ ¤‘‘
1’<
0 T
1. Borrow money
2. Buy commodity
3. Sell futures
contract
4. Deliver the commodity
against the futures
contract
5. Recover money &
payoff loan
0 T
1. Sell short the
commodity
2. Lend money received
from short sale
3. Buy futures contract
4. Accept delivery
from futures
contract
5. Use commodity
received to cover
the short sale
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FinQuiz Formula Sheet CFA Level II 2016
3. ƒ„‚A2=A#E $ÌDJ #M …‚ÌJ= (½;O u& 1žP<
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FinQuiz Formula Sheet CFA Level II 2016
2. Expected Credit Loss (%) = Payout ratio =
1 – Recovery rate (%)
3. Expected Credit Loss Amount or Payout
amount = Payout ratio % Notional amount
4. Loss Given Default:
• Expected loss = Full amount owed –
Expected recovery
• Expected loss = Loss given default %
Probability of default
• Prob. of default (at some point during
T years) = 1 – Prob. of no default
during T years
5.
Value of protection leg = Expected payoffof bond/loan with credit risk - Expected
payoff of bond/loan with no credit risks
6. Value of premium leg = PV of pmts. made
by the protection buyer to the protection
seller
7. Upfront pmt = PV of protection leg – PV
of premium leg
8.
Credit spread & Prob. of default % Loss
given default (%)
9. Credit spread Pricing Conventions
• Upfront premium = PV of credit
spread – PV of fixed coupon Or =
(Credit spread – Fixed coupon) % D of
the CDS
• PV of credit spread = Upfront prem. +
PV of fixed coupon
• Credit spread & (Upfront prem./D) +
Fixed coupon
• Upfront premium in % = 100 – Price
of CDS in currency per 100 par
• Price of CDS in currency per 100 par
= 100 – Upfront premium %
10. Profit for the buyer of protection & ¸ inspread in bps % D % NP
11. % change in CDS price = ¸ in spread in bps % D
12.
Basis = CDS spread (prem.) – Bond’scredit spread*
*Bond’s Credit spread = Yield on bond -
Investor’s cost of funding
Bond yield = R f rate + Funding spread +
Credit spread
where, R f + Funding spread = LIBOR
13.
Synthetic CDO = Portfolio of default-free
securities + CDS holdings
Reading 53: An Introduction to Multifactor
Models
1. Multifactor Model = R i = ai + b i1I1 + bi2I2+
…..+ biK IK + !i
2. Arbitrage Pricing Theory = E (R p) = R F +
3 1* p,1 + 3 2* p,2 + …..+ 3 k * p,k
3. Carhart Four Factor Model = E (R p) = R F+
* p1RMRF + + * p2SMB + + * p3HML ++
* p4WML…..+ SP
RMRF = Portfolio’s sensitivity to Mkt.
IndexSMB = small minus big
HML = high minus low
WML = winners minus losers
4. Macroeconomic Factor Model = R i =ai + b
i1 F1 + bi2 F2+ …..+ biK FK + !i
5. biK =Iìùüî ú— w —úû 쬬îë Z+T:îûîUî :ìùüî ú— w
F 8—úû :ìùüî¬ ú— w:
6.
Actual Inf. = Predicted Inf. + Surprise Inf.
7. Active R = Xý H XV
8. Active R (decomposition)=
WCq@8CAzC °p_°@zXz@Y H1wtp_·oY?q] °p_°@zXz@Y w É
Z?·@Cq X w r °p·[qz@Y °pAp·@zC_
9. Tracking Error TE = s(R P-R B)
10. Information Ratio = =V\+VÞ
9 V\+VÞ
11. Active risk squared = s2(R P-R B)
12. Active risk squared = Active factor risk +
Active specific risk
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