CFA 2016 Mind Maps Level 1

MIND MAPS

For learning CFA® Exam

LEVEL 1

2016

MIND MAPS

For learning CFA® Exam

LEVEL 1

2016

MIND MAPS

For learning CFA® Exam

LEVEL 1

2016

MIND MAPS

For learning CFA® Exam

LEVEL 1

2016

MIND MAPS

For learning CFA® Exam

LEVEL 1

2016

MIND MAPS

For learning CFA® Exam

1 . Code Of Et hics And

St a nda r ds Of

Pr ofe ssion a l Con du ct

a .

All CFA I nst it ut e m em ber s and candidat es ar e

r equir ed t o com ply wit h t he Code and St andar ds

St r uct ur e of t he CFA

I n st it ut e Pr ofessional

Conduct Pr ogr am

Basic st ruct ure for en for cing

t he Code and St andar ds

The CFA I nst it ut e Bylaw s

Rules of Pr ocedure

Based on t w o

prim ary principles

Fair pr ocess t o m em ber and candidat e

Confident ialit y of proceedings

Professional Conduct

pr ogr am ( PCP)

The CFA I n st it ut e

Board of Governors

Maint ains ov ersight and responsibilit y

Thr ough t he Discip linary

Review Com m it t ee ( DRC)

I s r espon sible for t h e

en for cem ent of t h e

Code and St andar ds

The CFA Designat ed

Officer

Direct s pr ofessional conduct st aff

Conduct s pr ofessional

conduct inquiries

An in q uiry can b e p r om pt ed

by sev er al circum st ances

Selfdisclosure

Wr it t en com plaint s

Ev idence of m isconduct

Report by a CFA ex am pr oct or

Analy sis of ex am m at erials and m onit or ing

of social m edia by CFA I nsit ut e

Pr ocess for t he enfor cem ent

of t he Code and Standar ds

Wh en an

inq uir y is

init iat ed

The Pr ofessional

Con du ct st aff con du ct s

an in v est ig at ion t hat

m ay include

Request ing a w rit t en ex planat ion

from t he m em ber or candidat e

I nt erv iewing

The m em ber or candidat e

Com plaining part ies

Thir d part ies

Collect ing docum ent s and records in support of it s inv est igat ion

Up on r ev iewing t he

m at er ial ob t ained d u r ing

t he invest igat ion, t he

Designat ed Officer m ay

Conclude t he inquir y w it h no disciplinary sanct ion

I ssue a caut ionar y let t er

Cont inue proceedings

t o discipline t he

m em ber or candidat e

I f fin d ing t hat a v iolat ion of

t he Cod e and St and ards

occu r r ed, t h e Design at ed

Officer p r op oses a

disciplinar y sanct ion

Accept ed by m em ber

Rej ect ed by m em ber

The m at t er is refer red t o a

hearing by a panel of CFA

I nst it ut e m em ber s

I f sanct ion is im posed

condem nat ion by t he m em ber 's peer s

suspension of candidat e's cont inued

par t icipant in t he CFA pr ogr am

b,c.

Six com ponent s of

t he Code of Et hics

Act w it h in t egrit y , com p et ence, d ilig ence,

respect and in an et hical m anner

I n t egrit y of in v est m ent pr ofession &

int erest of client s abov e per sonal int erest

Care & j udgm ent

Pract ice et hics & encour age ot hers t o pr act ice

I nt egrit y & v iabilit y of t he global capit al m ark et s

Professional com pet ence

Seven St an dar ds of

Pr ofessional Conduct

Professionalism

I nt egrit y of Capit al m ar k et s

Dut ies of Client s

Dut ies t o Em ployers

I nv est m ent analysis, Recom m endat ions & Act ions

Conflict of int erest

Resp on sib ilit ies as a CFA I n st it ut e

m em ber or CFA Candidat e

2 .1 St a n d a r d I

applicable law s and regulations

Code and St andards vs. Local law Follow stricter law and regulation

Participation or association w it h violat ions by ot hers

Responsible for violations in w hich they know ingly participate or assist D isso ciat e fr o m illeg al,

unet hical activities Leave em ployers ( in ext rem e case)

I nt erm ediat e st eps

At t em p t t o st op t h e b eh av ior b y b r in g ing it t o t h e at t en t io n o f em ployer t hrough a supervisor or com pliance depart m ent May consider direct ly confront ing

t he involved individuals

I f n o t su ccessful, - - > st ep aw ay an d dissociat e from t he act ivit y by

Rem oving t heir nam e from w ritt en report s Asking for a different assignm ent I nact ion w it h cont inued associat ion m ay be const rued as know ing part icipat ion com pliance personnel or legal counsel

W h en d isso ciat ing f r o m v io lat ions, - - > D o cu m ent any violat ions and urge firm s t o stop t hem

Firm s

Develop and/ or adopt a code of et hics Make available t o em ployees info t hat highlights applicable law s and regulations

Est ablish w rit t en procedures for report ing suspect ed

Maint ain independence and obj ectivity in professional activities

How t o cope w it h ext ernal an d Allocat ion of shares in oversubscribed I POs. ..

From public com panies To issue favorable report s

Fr o m Bu y side client s May t r y t o p r essure sellside analyst s

t hreatening independence and obj ect ivity

Recom m endat ions m ust

convey true opinions free of bias from pressures be st at ed in clear independent , and unbiased analysis Must fully disclose potent ial conflict s, including the nature of com pensation Must st rict ly lim it t he t ype of com pensat ion t hey accept for conduct ing research

Best pract ice

Accept only flat fee for t heir w ork prior to w riting the report Wit hout regard t o conclusions or recom m endat ions

RPC

Prot ect int egrit y of opinions Creat e a rest rict ed list

Rest rict special cost arrangem ent s Lim it gift s or any false or m isleading st at em ent Mu st n o t k n o w in gly m ak e any aspect of pract ice, including

qualificat ions or credent ials, services perform ance record

Wit hout regard t o conclusions or recom m endat ions

charact erist ics of an invest m ent any m isrepresent at ion relating t o

Writ ten list of available services, description of firm 's qualification Designat e em ployees t o speak on behalf of firm At tribut e sum m aries

D . M iscon du ct

Guid a nce

Address conduct relat ed t o professional life

Violations

An y act in v o lv ing ly in g, ch eat ing, st ealing, o t h er d ish o nest co n duct t h at reflect s adver sely on m em ber's pr ofessional act ivit ies w ould be violat ion Conduct dam aging t rust w ort hiness or com pet ence ( include behaviour m ay not be illegal but negat ively affect a m em ber t o per form responsibility such as abusing alcohol during lunch hours)

Abuse of t he CFA I nst it ut e Professional Conduct Program

I nvolved in personal bankruptcy is not autom at ically assum ed t o be in violation but bankruptcy involve fraudulent or deceit ful business conduct m ay be a violation

RPC

Develop and/ or adopt a code of et hics

Dissem inate to all em ployee a list of potential violations Check r eferences of pot ent ial em ployees

3 + 4 GI PS

I n t r odu ct ion t o Glo b a l

I n v e st m e n t Pe r for m a n ce

St a n da r ds ( GI PS)

a1. Why w ere t he GI PS St andar ds cr eat ed?

The financial m ar ket s and invest m ent m anagem ent indust r y ar e becom ing incr easingly global

a2. Who can claim com pliance?

Only invest m ent m anagem ent firm s t hat act ually m anage asset s

a3. Who benefit fr om Com pliance?

Prospect client s and invest m ent m anagem ent firm s discr et ionar y p or t folios m anaged in accor dance wit h t he sam e invest m ent obj ect ive or st r at egy

To obt ain global accept ance of calculat ion and pr esent at ion st andar ds in a f air , com par able f or m at wit h f ull disclosur e To ensure consist ence, accur at e invest m ent per form ance dat a To pr om ot e f air com pet it ion am ong invest m ent m anagem ent f irm s To pr om ot e global "self r egulat ion"

Key char act erist ics

To claim GI PS, invest m ent m anagem ent fir m s m ust define it s "fir m "

Require Firm s t o include all a ct ua l fe e p a y ing , discr e t ion a r y port folios in com posit es defined accor ding to sim ila r st r a t e gy / inv e st m e n t obj e ct iv e s

Re ly on int e g r it y of inpu t d a t a

I f an invest m ent firm applies GI PS in a perform ance sit uat ion t hat is not addr essed specifically by GI PS/ is open t o interpr et at ion, disclosures ot her t han t hose required by GI PS m ay be necessary GI PSd o n ot address every aspect of perform ance

m easurem ent , valuat ion, at t ribut ion or cover all asset classes

Firm s m ust m eet

f ull

com p lia nce

t o claim GI PS

Com pliance cannot be achieved on a single pr oduct , por t folio, or com posit e

Effect iv e dat e

The effect ive dat e of t he revised St andards is 1 Jan 2011. Present ations t hat include perform ance results for periods after 31 Dec. 2005 m ust m eet all t he requirem ent s of t he revised GI PS. Perform ance present at ions t hat include results through 31 Dec. 2005 m aybe prepared in com pliance w it h t he 1999 version of GI PS.

Docum ent s policies and pr ocedur es

Firm s m ust docum ent , in w rit ing, t heir polices and procedures used in est ablishing and m aint aining com pliance w ith all requirem ents of GI PS

Claim s of com pliance

St at em ent s referring t o t he per form ance of a single, exist ing client as being "calculated in accordance w it h t he Global I nvest m ent Perform ance St andards" are pr oh ibit e d except w hen a least 5 years aft er discont inuat ion

Th e scope of t h e GI PS

all discretionary and non- discretionary assets under m anagem ent. This includes bot h fee- paying and non- fee- paying asset s

Hist or ical per for m ance r ecor d

Firm s m ust initially show GI PS com pliant history for a m inim um of 5 y e a r s, or since ince p t ion if t he firm has been in exist ence for le ss t ha n 5 y e a r s.

Aft er 5- year com pliant hist ory has been achieved, firm s m ust add an addit ional year of perform ance each year unt il 10- year perform ance record is est ablished, at a m inim um

A firm m ay link non- GI PS com pliant perform ance t o it s com pliant hist ory as long as only GI PS com pliant perform ance is

present ed for periods after 1 Jan. 2000; and

Firm discloses non- com pliance period and explain how it is not in com pliance w it h GI PS

Firm s previously claim ing com pliance w it h an I nvest m ent Perform ance Council- endorsed Count ry Version of GI PS are grant ed reciprocity t o claim com pliance w ith GI PS for historical periods prior to 1 Jan. 2006

H ow a r e GI PS st a n d a r d s

Fundam ent als and Com pliance

I nput dat a

Consist ency of input dat a is crit ical t o effect ive com pliance w it h GI PS and establish a foundation for full, fair and com parable perform ance present at ions

Calculat ion m et hodology

Uniform it y in m et hods used t o calculat e ret urns t o achieve com parability am ong firm s

Com posit e const r uct ion

com posit e ret urn is t he a sse t - w e igh t e d average of all t he

port folios' perform ance result s

Disclosures

allow firm s t o elaborat e on t he raw num bers and give t he end user t he proper cont ext t o underst and

No "negat ive assurance" is needed for non- applicable disclosures

Present at ion and r epor t ing Real est at e

Privat e equit y

Refers t o invest m ents in non- public com panies t hat are in various st ages of developm ent and vent ure invest ing, buyout invest ing and m ezzanie financing

Wr ap Fee/ Separ at ely Managed Account ( SMA) por t folios.

Wrap fees are a t ype of bundle fee and are specific t o a part icular invest m ent product is charged by a w rap fee sponsor for investm ent m anagem ent services and included trading expenses t hat cannot be separat ely ident ified can be all- inclusive, asset - based fees and m ay include a com bination of invest m ent m anagem ent fees, t rading expenses, cust ody fees and/ or adm inist rat ion fees

http://www.e-junkie.com/ecom/gb.php?cl=274078&c=ib&aff=283565

To be con t in u e d…

5 . TI M E VALUE

OF M ON EY

a . I n t e r e st r a t e ,

con side r e d a s

Required rat e of ret urn

equilibr ium int er est rat e for a

par t icular invest m ent

Discount rat e

for calculat ing t he pr esent v alue of

fut ure cash flow s

Opport unit y cost

b. I n t e r e st r a t e

Nom inal r isk - free rat e = real r isk - free rat e

+ ex pect ed inflat ion rat e

r eal r isk - f r ee r at e is a t heor et ical

rat e on a single- per iod loan when

t here is no expect at ion of inflat ion.

Sev er al r isk s of securit ies

def ault r isk

a borr ower will not m ake t he pr om ised paym ent s in t im ely m anner

liquidit y r isk

r eceiving less t han fair value if an invest m ent m ust be sold f or cash quickly

m at ur it y r isk

Lo ng e r- t e rm bonds have m ore r isk t hansho rt e r- t e rm bonds

- - > The r e quir e d r a t e o f r e t ur n on a se cur it y = r e a l r isk - f r e e r a t e + e x pe ct e d infla t ion r a t e

+ d e f a ult r isk pr e m ium + liquidit y pr e m ium + m a t ur it y r isk pr e m ium

c,d. EAR

represent s t he annual rat e of ret urn act ually being ear ned

aft er

adj ust m ent s hav e been m ade for different com pounding per iods

Wher e:

Per iodic r at e = st at ed annual r at e/ m

m = t he num ber of com pounding per iods per y ear

Non- annual t im e value of

m oney problem s

divide t he st at ed annual int er est rat e by t he num ber of com pounding

per iods per y ear,

m ,

and m ult iply t he num ber of years by t he num ber

of com pounding periods per y ear

e . CF ca lcu la t ion s

Fut ur e value

Pr esent value

Annuit y

a series of equal cash flow s t hat occur s

at ev enly spaced int er vals over t im e.

Or dinary Annuit y

occur at the en d of each tim e period .

Annuit y Due

occur at the beginning of each t im e per iod.

FV of Annuit y Due = FV of Or dinar y

Annuit y x ( 1+ I / Y)

PV of Annuit y Due = PV of Or dinar y

Annuit y x ( 1+ I / Y)

PV of a Perpet uit y

Uneven CF

Discount each individual cash flow s

Use CF funct ion in Calculat or

f1 . Use t im e lin e

t o solve m any t y pes of t im e

v alue of m oney problem s

Loan pay m ent

and Am ort izat ion

Find PMT

Find N

Find I / Y

Am ort izat ion t able

Ot her applicat ions

Rat e of com pound growt h

Num ber of per iods for specific gr ow t h

Funding a fut ure obligat ion

Connect ion bet ween

PV, FV & series of CF

t he sum of t he pr esent values of t he cash Rows is t he pr esent value of t he ser ies. The sum of t he fut ur e values ( at som e fut ur e t im e = n) of a ser ies of cash flows is t he fut ur e value of t hat ser ies of cash flows.

Theca sh flow a dd it iv it y pr inciple r efer s t o t he f act t hat pr esent value of any st r eam of cash flows equals t he sum of t he pr esent values of t he cash flows

6 . D I SCOUN TED

CASH FLOW

APPLI CATI ON S

Ca lcu lat e ,

I n t e r p r e t ,

D e cision ru le

NPV

t he PV of t he cash flow s less t he initial ( tim e = 0) out lay

w h ere:

CFt = t he expect ed net cash flow at t im e

t

N = t he est im at ed life of t he invest m ent

r = t he discount r ar e ( opport unit y cosr of capit al)

Decision r ules

Acce pt pr oj ec t s w it h a posi t ive NPV

Rej ect proj ect s w ith a negat ive NPV

Tw o m ut ually ex clusive pr oj ect s:

accept higher posit ive NPV

I RR

is t he discount r at e t hat m ake t he

NPV of a proj ect equal to zer o

Pr oblem s

Conflict wit h

NPV due to

Different proj ect size: t he sm aller proj ect s m ay have

higher I RR but t heir contr ibut ion t o t he fir m value

m ay be sm aller com pared t o t he larger pr oj ect s

Differen t im ing of cash flow s

Mult iple I RR or No I RR

When CFA pat t er n is unconvent ional

Unr ealist ic assum pt ions

I RR m et hod: proj ect cash flow s ar e

assum ed to r ein vest at I RR w hile w it h NPV

it is assum ed to r ein vest at m ar ket rat e

- -> at t he bot t om lines: use NPV

Decision r ules

Accept proj ect s w it h an I RR > t he firm 's

( invest or 's) r equir ed r at e of r et ur n.

Rej ect proj ect s w ith an I RR < t he firm 's

( invest or 's) r equir ed r at e of r et ur n.

For single proj ect , I RR and NPV

lead t o exact ly t he sam e decision

H PR

is t he percent age change in an

_{invest m ent over t he period of holding}

Por t f olio

r a t e of r e t ur n

Money Weight ed

defined as t he I RR

Mor e appr opr iat e if m anager has

com plet e cont r ol over cash in/ out

Tim e weight ed

( chain- link)

m easur es com pound gr ow th

Not affect ed by cash in/ out

Pr efer r ed m et hod

3 st eps

Value t h e invest m en t im m ediat ely aft er

an y wit hdr awals or deposit s, divide t he

overall invest m ent horizon int o subperiods

Calculat e HPR for each subpediod

Com put e t he geom et ric m ean

Yie lds of T- b ills

Bank discount yield

Not m uch m eaningful

1. Based on face value, not price

2. Use 360- day

3. Use sim ple int er est , ignor e

r einvest m ent of int er est

Wh er e:

r

BD

= t he annualized yield on a bank discount basis

D = t he dollar discoun t , w hich is equal t o t he difference

bet w een t he face value of t he bill and t he pur chase pr ice

F = t he face value ( par value) of t he bill

t = num ber of days r em aining unt il m at ur it y

36 0 = bank convent ion of nu m ber of days in a year

Holding period yield

Wh er e:

Po = init ial pr ice of t he t he inst r um ent

P

1

= pr ice r eceived for inst r um ent at m at ur it y

D

1

= int er est paym ent ( dist r ibut ion)

Effect ive annual yield

Money m arket yield

r

MM

= HPY x ( 360/ t )

Bond equivalent yield

BEY = 2 x

sem i annual discount rat e

Con ve r t a m on g t h e se yie lds

7 . St a t ist ica l Con ce p t s

t he populat ions of int er est

Sam ple st at ist ics

Types of m easurem ent scales

Nom in al scales

Classify or count obser v at ions w it h no par t icular or r ank ing

Or dinal scales

Specified char acter istics ar e used t o cat egor ize obser v at ions band inv olv e r ank ing

No t r ue zer o point cannot build m eaningful r at ios

Rat io scales

Pr ov ide r ank ing, equal differ ences bet w een scale v alues and t r ue zer o point

b .

Param et er vs. Sam ple st at ist ic

A par am et er is a m easur e u sed t o descr ibe a char act er ist ic of a populat ion A sam ple st at ist ic is used t o

calculat ed by div iding t he absolut e fr equen cy of each r et u r n int er val by Cum ulat ive relat iv e frequency

sum m ing t he r elat iv e fr equencies st ar t ing at t he lowest int er v al and pr ogr essing t hr ough t he highest .

d . Hist ogram

bar char t Frequency polygon line char t

e . M e a su r e s of for cont inuous dist r ibut ion

f. Qua nt ile

Variance & St andard deviat ion Populat ion

CV ( Coefficient of Variat ion) Sharpe Rat io / Reward- t o- Variabilit y rat io

t he fr equency of exper iencing losses and gains ar e t h e sam e

To be con t in u e d…

F o r M O R E C F A

®

_{M i n d M a p s , p l e a s e g o}

_to:

Useful t o a wide r ange of user s in m aking econom ic decisions

> To evaluat e past , cur rent , and prospect ive per for m ance & fin posit ion

> To m ak e econom ic decisions

2 2 . FSA

I n t rodu ct ion

Role s of FR & FSA

FR

El em ent

Financi al St at em ent

Addi t i onal di scl osures requi red by regul at ory

Any com m ent ary by m anagem ent

Role of FR

Fi nanci al posi t i on

Firm 's perform ance

Changes i n fi nanci al posi t i on

Roles of FSA

Use i nfo in a com pany ' s Fin St at em ent s

Use ot her r el ev ant i nfo

Ro le of k e y FS

I n com e St at em ent

Rev enues

Ex penses

Gains and Losses

Balance Sheet ( A= L+ OE)

Asset s

Li abi l i t i es

Owner s' equi t y

CF statement

CFO

CFI

CFF

St at em ent of changes in Owners' equit y

I m p ort a n ce of

FS not es ( foot not es)

di scl ose t he basi s of pr epar at ion for FS

( e.g: account ing m et hods, assum pt ions,...)

Addi t i onal i t em s:

acqui si t i ons or di sposal s

l egal act i ons

em pl oy ee benefit pl ans

cont i ngenci es and com m i t m ent s

si gnificant cust om er s

sal es t o r elat ed par t i es

segm ent s of fir m

ar e audi t ed

Su pplem en t ary sch edules

not audit ed

oper at i ng incom e or sal es by r egi on

or busi ness segm ent s

r eser v es for an oil and gas com pany

i nfo about hedgi ng act iv i t ies and

financi al i nst r um ent s

MD&A

assessm ent of financial per form ance and condi t ion of a

com pany fr om t he per spect i v e of it s m anagem ent

Publ i cl y hel d com pani es i n US

Resul t s fr om oper at ions, wi t h t rends

i n sales and ex penses

Capi t al resources and l i qui di t y , w i t h t rends i n CF

Gener al busi ness ov er v iew

discuss accou nt ing policies t hat require

significant j udgem ent s by m anagem ent

discuss significant effect s of t rends, event s, uncert aint ies

liquidit y and capit al resource issues, t ransact ions

or event s wit h liquidit y im plicat ions

Discont inued operat ions, ext raordinary

it em s, unusual or infrequent event s

Ext ensive disclosures in int erim financial st at em ent s

disclosur e of a segm ent 's need for CF

or it s cont ribut ion t o revenu es or profit

Au dit s of FS

= independent r eview of an ent it y's FS

obj ect ive: audit or's opinion on fairness

an d reliabilit y of FS, " no m at er ial er ror s"

St andard audit or's opinion

3 par t s

I ndependent r ev i ew t h ough FS prepared by m gm t and are i t s responsi bi l i t y

Reasonabl e assur ance of no m at er ial er r or s ( foll ow gener all y accept ed audi t ing st andards)

FS pr epared i n accor dance wi t h accept ed account i ng pr inci pl es, r easonabl e account i ng pr inci pl es and est im at es, consist ency

Ex planat or y par agr aph: w hen a m at er i al l oss i s probabl e but

am ount cannot be r easonabl y est im at ed. Uncer t aint ies

m ay r el at e t o t he going concer n assum pt ion - - > si gnal ser i ous

pr obl em s and need cl ose ex am inat i on by an al y st

( under US GAAP) : Opi ni on on int er nal cont r ol s

3 t y pes of Opi ni ons

U n q u a lif ie d

opi ni on: audit or bel i ev es st at em ent s ar e fr ee fr om m at er ial om i ssi ons and er r ors

Qua lif ie d

opi ni on: i f st at em ent s m ak e any ex cept i ons t o account ing pr inci pl es - - > ex pl ai n t hese ex cept i ons

Ad ve r se

opi ni on: i f st at em ent s ar e not pr esent ed fair ly or ar e m at er ial l y nonconfor m i ng w it h account i ng st andar ds

Ot h e r in fo sou r ce s

I nt erim report s

Quart erl y or sem i - report s

( NOT audit ed)

Proxy st at em ent s

About elect i on of boar d m em ber s, com pensat i on, m anagem ent and qual i fi cat ions

and i ssuance of st ock opt ions

Fi l ed w i t h SEC

Corporat e report s and press releases

Viewed as PR or sales materials

FSA fr a m e w or k

1. Ar t iculat e t he Pur pose & Cont ext of an alysis

2. Collect dat a

3. Process dat a

4. Analyze/ int erpret dat a

5. Report t he

con clu sion s

or

r e com m e n da t ion s

6. Updat e t he analysis

2 3 . Fin a n cia l r e por t in g

m e ch an ics

Cla ssifica t ion

Ope r a t in g act ivit y :

act iv it ies t hat are part of t he day- t o- day business funct ion of an ent it y

I n ve st in g a ct ivit y :

act ivit ies associat ed w it h acquisit ion & disposal of long- t erm asset

Fin a n cin g a ct ivit y:

act ivit ies relat ed t o obt aining or repaying capital from shareholders or credit ors

Accoun t & fina n cia l

st a t e m e n t

FS e le m e n t s

& a ccou n t s

Elem ent s

Asset s

Liabilit ies

Equit y

Rev enue

Ex pense

Account s

Ch a r t of a ccoun t s

: set fort h t he act ual account s used in a com pany 's account ing sy st em

Con t r a a ccou n t :

offset or deduct ed from ot her account s

Accou n t ing e qu a t ion

Asset s

Liabilit ies

Ow ners' equit y

Cont ribut ed capit al

Ret ained earning

Ex pa n din g:

A = L + Cont ribut ed capit al + BGN Ret ained earnings + Rev - Exp - Dividend

Accr ua ls & V a lua t ion

a dj u st m e n t

Accr u als

Cash m ovem ent prior t o Acct . recognit ion

Unearned ( Deffered) revenue

Pr epaid expense

Cash m ovem ent aft er Acct . recognit ion

Unbilled ( Accr ued) rev enue

( w hen billing, Un.Rev decrease & Receiv ables increase)

Accrued ex pense

Va lu a t ion a dj u st m e n t :

m ade t o com pany's A or L so t hat account r ecor ds cur r ent m ar ket value ( not

Hist orical cost )

Re la t ionship s a m ong I S,

BS a n d st a t e m e n t of CFs,

a n d of ow n e r s' e qu it y

BS: show a com pany' s financial posit ion at a point in t im e

Changes in BS account s during an account ing period are

reflect ed in I S, st at em ent of CFs and ow ners' equit y

Accou nt in g syst e m

Flow of in for m a t ion

1. Journal ent ries & Adj ust ing ent ries

( r ecor d= t im e)

2. General ledger & T- account s

( record= order)

3. Trial balance

( list account balances at a part icular point in t im e)

4. Fin. st at em ent

D e bit & Cr e dit

Usin g fin . st a t e m e n t

in se cur it y a na lysis

Analyst uses FS t o j udge t he fin. healt h of t he com pany

Analyst can use his under st anding t o det ect m isr epr esentation

En h a n cin g

Under st andabilit y

Verifiabilit y

Com par abilit y

(

consist ent am ong firm s and t im e periods)

Tim eliness

2 4 . Fina n cia l

Rep ort ing St an d ar d s

Ov e rv iew FRS

Obj e ct iv e of FR:

pr ovide fin. info about t he r eport ing ent it y

I m por t ance of r epor t ing st andar ds in secur it y analysis and v aluat ion

St a n da rd set t in g &

Regu lat or y bodie s

St a n da r d- se t t in g bodie s

( est ablishing st andar ds)

I ASB ( I nt er nat ional Account ing St andar ds Boar d)

US FASB ( Financial Account ing St andar ds Boar d)

Re gu la t or y a u t h or it ie s

( enfor cing st andar ds)

I OSCO ( int er nat ional) :

not a regulat ory, but it s m em bers regulat e significant port ion

FSA ( in UK)

SEC ( in USA)

1. Prot ect i nvest ors

2. Ensure: m arket i s fair, effici ent , t ransparent

3. Reduce syst em at ic risk

c.

St at us of global conver gence of account ing st andar ds

Bar r ier s t o developing one univ er sally accept ed set of financial r eport ing st andar ds

disagree

st andard set ting bodies

regulat ory aut horit ies

polit ical pressures from business groups and ot hers

I FRS fr a m e w or k

Qu alit a t iv e

ch a r act e r ist ics

Relev ance

Fait hful pr esent at ion

( com plet e, neutral, free from error)

Const r a in t s

Tr ade off acr oss Enhancing char act er ist ics

( r eliabilit y and r elev ance: t im ely )

Cost

Non- quant ifiable info: om it t ed

Ele m en t s of FS

Measurem ent s

of Financial posit ion: A, L, E

of per for m ance: I ncom e, Ex pense

Assum pt ions

Accr ual basis

Going concer n

Recognit ion pr incipal

Cost can be r eliable m easur ed

Pr obably fut ur e econom ic benefit will flow t o ent it y

Measurem ent bases

H ist or ica l cost

: am ount originally paid for t he asset

Cu r r e n t cost

: would have t o pay t oday for t he sam e asset

Re aliz able va lu e :

am ount for w hich fir m could sell t he asset

Pr e se n t v a lu e

: discount ed fut ur e cash flows

Fa ir v a lu e

: 2 par t ies in an ar m 's lengt h t r ansact ion would ex change t he asset

Ge n e r a l r e quir e m e n t s

for FS u n der I FRS

Requir ed financial st at em ent s

BS, I S, CFS, OE, Ex planat or y not es ( inclu. account ing policies)

Pr inciples for PREPARI NG

Fair pr esent at ion

Going concer n basis

Accr ual basis

Aggr egat ion

No offset t ing

Consist ency

Mat er ialit y

Com par at ive infor m at ion

Frequency of r eport ing

I FRS ( by I ASB) #

US GAAP ( by FASB)

Pur pose of fr am ewor k

I ASB requi res m gm t t o consider t he

fram ew ork if no explicit st andard exist s

Obj ect ives of financial st at em ent s

I ASB sam e obj ect ive

FASB di fferent obj ect ives for biz and non- biz

Assum pt ions

I ASB em phasizes going concern

Qualit at iv e char act er ist ics

Prim ary charact erist i cs

FASB: relevance, reliabilit y

I ASB: com parabi lit y, underst andabi lit y al so

Financial st at em ent elem ent s

Perform ance

I ASB: incom e+ expenses

FASB: Revenues, Expenses, Gains,

Losses, com prehensive incom e

Asset definit ion

I ASB: resource from w hich fut ure

econom ic benefit is expect ed

FASB: fut ure econom ic benefit

" Probable"

I ASB: define crit eria for recognit ion

FASB: define asset s and liabilit ies

Values of asset s t o be

adj ust ed upw ard

I ASB: allow

FASB: not allow

Effect iv e FR

Char act er ist ics of a coher ent

financial r epor t ing fr am ewor k

Tr anspar ency

Com prehensiveness

Consist ency

Bar r ier s t o cr eat ing a coher ent

financial r epor t ing fr am ewor k

Valuat ion

St andar d set t ing

Pr inciples- based

I FRS

r elies on br oad fr am ewor k

Rules- based

FASB in t he past

specific guidance how t o classify t r x

Obj ect ives orient ed

FASB m oving now

blend t he ot her t wo

Measurem ent

To be con t in u e d…

F o r M O R E C F A

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_{M i n d M a p s , p l e a s e g o}

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4 5 . M a r k e t Or ga n iza t ion

F.A:

secur it ies, cur rencies...

R.A:

com m odi t ies, real est at e...

Public vs. Privat e securit ies

Pu b lic se c

: t rade on ex changes

Pr iva t e se c

: not t r ade on ex change

Debt vs. Equit y vs. Derivat ive

D e b t

Eq u it y

D e r con t r a ct :

v al ues depend on t he v al ues of ot her asset s

Prim ary vs. Secondary m arket

Pr im a r y :

for new l y i ssued sec

Se cond a r y:

subsequent s sales of sec

Money vs. Capit al m arket

Forwar d, Fut ures, Swap, Opt ion

I nsur ance

Cr edit defaul t sw ap

Block brokers

help lar ge t r ades

I nv est m ent bank s

Ex changes

Al t ernat i v e t radi ng sy st em s ( ATS)

Deal er s

ear n profit fr. bid- ask spread

Securit izers

Deposit ory inst it ut ions

I nsurance com panies

Short sales

borr ow secur it ies & sell

Leveraged posit ions

bor r ow funds t o buy A

Margin call P

= P

₀

1 Initial margin

1 Maintenance margin

Com plet e m arket

( Availabilit y)

Operat ional efficiency

( Low cost )

I nform at ional efficiency

( P r eflect s fundam ent al in fo)

Allocat ional efficiency

( at t he best efficiency)

Ob j e ct ive s of

m a r k e t r e g ula t ion

Prot ect unsoph ist icat ed in vest ors

Est ablish m inim um st an dard of com pet ency

Help invest ors evaluat e per form ance

Preven t insider

Prom ot e com m om FR requirem ent s

Require m inim um level of capit al

Adj ust for st ock split

NOT adj ust

I lliqui di t y, t ransact ions cost s, high t urnover of

const i t uent securi t ies

= > D ifficu lt

&

e x pe n siv e

t o

re plicat e F.I in de x

4 6 . Se cu rit y

M a r k e t I ndice s

Se cu r it y

m a rk e t in de x

used t o pr esent t he per form ance of an asset

class, secur it y m ar k et or segm ent of a m ar k et

Ca lcula t e a n inde x

Pr ice

index: calculat e price only

Re t u r n

index : include P+ I ncom e

I n de x con st r u ct ion

& m a n a ge m e nt

Which t arget m arket ?

Which securit ies?

How weight ?

Re- balancing fr equency ?

Re- ex am ining when?

W e igh t in g m e t h ods

Pr ice - w e igh t e d

index

=

Su m

of st ock pr ices

/ N u m be r

of st ock s adj ust ed for split s

Adv & Disad

Adv :

sim ple

D isa d:

% change in a high- pr iced st ock will hav e a gr eat er

effect on t he index

.

Equ a l- w e igh t e d

index

Equivalent t o a por t folio t hat has equal dollar

am ount s invest ed in each index st ock

M a r k e t - ca p w e igh t e d

index

Weight s based on t he m ar ket - cap of each index st ock

Cr it icism : lar ge com pany has gr eat er im pact

Float - adj ust ed m ar ket cap- weight ed index

M a r k et f loa t

: ( - ) shar es fr om Cont r olling shar eholder s

Fr e e floa t :

Mar ket float - Not available t o foreign invest ors

Fu n d am e n t a l

w eight ing

( earnings, dividends, cash flow)

Re ba la n cin g &

Re con st it u t ion

Re ba la n ce :

adj ust t h e weight s of securit ies

uses for

Equ a l- w e igh t e d in de x

Recon st it u t ion :

add & delet e securit ies t hat m ake up an index

U se s of se cur it ie s

m a r k e t in dice s

Reflect m arket sent im ent

Pr ox y

for m easuring of m arket ret urn & risk

Pr ox y

of bet a & risk- adj ust ed ret urn

Benchm ark of m anagem ent perform ance

Model port folio for index fund

Type s of e qu it y in dice s

Broad m arket equit y

Mult i- m arket

vs.

Mult i- m ark et wit h fundam ent al weght ing

Sect or index

St yle index

Mar ket - cap

Value/ Gr owt h

Type s of Fix e d I n com e in dice s

Large universe

Dealer m arket & infrequent t rading

Alt e r n a t ive in ve st m e n t in dice s

Com m odit ies index

based on fut ur e cont r act

Hedge fund index

m ay hav e upw ar d- bias

Real est at e index

5 7 . D e r iv a t ive

M ar k e t s an d

I n st r u m en t s

D e f in it ion

I t s r etur n is based on anot her

inst r um ent ( under ly ing assets)

Under ly ing assets

Physical

Finance

The biggest t rading v olum e

Event

W h e r e de r iv a t ive s a r e t ra de d?

Ex change

Organized m ark et - > liquid

St andard t erm s

No default r isk

Daily set t lem ent

OTC

priv at e bet w een 2 part ies - > illiquid

Cust om ized t erm s

default risk & legal risk

at t he end of t he cont ract : set t lem ent

Ch a ra ct e rist ics

For w ar d com m it m ent

Fir m and binding agr eem ent - > obligat ion

No prem ium paid up front

Contingent claim s

The long has t he flex ibilit y - > opt ions

Prem ium is paid up front by t he long

Ty pe s of d e riv a t ive s

For w ar ds

Exchange, OTC, Forwar d com m it m ent

Fut ur es

Exchange, Forw ard com m it m ent

Opt ions

Exchange, OTC, Cont ingent Claim s

Swaps

OTC, Forward com m it m ent s

Cr edit derivat ives

a cont r act t hat pr ov ides a bondholder

( lender ) w it h pr ot ect ion against a

dow ngr ade or a default by t he bor r ow er

Ty pes

Credit default swap ( CDS) - > m ost com m on

Cr edit spread opt ion

Pu r pose s of d e riv a t ive s m a r k e t

Pr ice discov er y

I nform at ion about underlying pr ice

Risk m anagem ent

Cont r ol risk

Mar ket efficiency

Mispr iced - > adj ust quickly - >

m ar k et efficiency

Tr ading efficiency

Low t nx cost

Crit icism

Com plex

Difficult t o under st and

Legal gam bling

Zero- sum gam e

Ar bit ra ge & t h e la w of on e price

Ar bit r age

Buy an asset at one pr ice

Concurrent ly sell it at higher price

- > Riskless profit w it hout invest m ent

The law of one pr ice

NO ar bit r age opport unit ies ex ist

5 9 . Risk M a n a ge m e n t

Applica t ions of

Opt ion St r a t e gie s

Cove r e d ca ll

= Long st ock + short call

= S - C

Covered call = call is covered by a long st ock

Payoff diagram

Payoff ( covered call) = Payoff ( Long st ock) + Payoff ( short call)

= S

T

- Max( 0, S

T

- X)

Profit ( Covered call) = Payoff ( Cov ered call) - So + C

Max loss when payoff is m in - > S

T

= 0 - > Max loss = So - C

Max profit when payoff is m ax - > ST > X

Payoff diagram ( Covered call) : sim ilar t o payoff diagram of short put

Pr ot e ct ive pu t

= Long st ock + Long put

= S + P

Prot ect ive put = Long put prot ect s pot ent ial loss of a st ock

Payoff diagram

Payoff ( Prot ect ive put ) = payoff ( Long st ock) + Payoff ( long put )

= S

T

+ Max( 0, X - S

T

)

Profit = Payoff - So - P

Max loss when payoff is m in - > S

T

= 0 - > Max loss = So + P - X

Max profit when payoff is m ax - > ST > X - > Max profit is indefinit e

Payoff diagram ( prot ect ive put ) is sim ilar t o t hat of long call

To be con t in u e d…

F o r M O R E C F A

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_{M i n d M a p s , p l e a s e g o}

_to: