Thursday, November 10, 2011

Economics for CFA Level 1 / BAT and Intro to Strategy

Economics for CFA and Valuations

Abstract: CFA Level 1 Economics and its important topics are discussed with some motivation on how and why to study this.

Introduction
Before we move into the area, I wanted to share with you what I like the most about this subject.
Since the time I was 20 yrs old I got this habit of watching documentaries and the most talked about instrument in the documentary of finance is "Federal Reserve", and I always wanted to understand how:
  • Fed works,
  • how acts of fed are related to business, 
  • how would it change the yield, cost of capital, share pricing 
  • and things like the role of fed in big events

I also wanted to interpret how beneficial are fed's moves to common man vs big corporation. So, when I got this subject it was pleasure to read and understand things. Especially the supply and demand of money, read GDP's dependencies on various stimulus and operations are all very interesting area.

When it comes to understand areas like currency warfare, job loss, etc this subject holds the key.

Exam preparations
I would like to discuss something that I found very interesting in the Economics of the CFA curriculum. I am new to this area, and found things like:
Short term vs long term behavior quite interesting.
Why interception of ATC vs MC.


I gave some mock tests on Eco and found these questions particular interesting which broadly defines the syllabus:
Taylor
Phillip
M2
laffer Curve
HHI Index
CPI
Symmetry Principle which says the results should be symmetrical
Automatic Stabilizers

And some other topics...

Specialties: News analysis is the best thing in the book

Some interesting areas in Micro Economics which need deep thinking:
  • Tax on seller vs tax on buyers
  • Small areas of interest is the tax effect on the supply and movement and how they would shift when the tax burden is placed on either of the sides. 
  • When we come to the area of curves, the notion about MC=MR is an important concept which is the pillar for 4-5 chapters.
Personally speaking the Chapter: Market for factors of production was the most tough. I am still reading some graphs of this chapter.

Supply of renewable source is in-elastic and non-renewable source is elastic. I took a long time to get this idea. Example oil you the nations will supply less even if we increase the price. Note that supply curve is the willingness of producer to supply at increasing rates.

Spirituality in macro economics: Whatever you do, in the long run things will be where they deserve to be. This applies to potential GDP a lot, where we have changes is SAS and its effect on GDP.

Money multiplier effect: money multiplier = (1+c) / (d+c)
where c is the currency as a percent of deposit and d is the desired reserve ratio

Aggregate supply and Aggregate demand for two scenarios where the GDP is below full employment and above full employment. It is quite interesting to note that when demand increases the real supply decreases and when demand decreases the real supply increases. The important term here is real as the prices will be more or less which will effect the measure of demand supply.

Conclusion: I have talked about some of the areas on Eco for CFA level 2.

CFA Level 2:
I started with Forex which is an area that I like and will look into it more deeply.

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