Wednesday, January 11, 2012

Thursday, January 5, 2012

Derivatives and Fixed Income CFA Level 2

Derivatives and Fixed Income CFA Level 2

To understand this topic we need to understand beta and duration very well:
  1. Beta comes from linear regression
  2. Whereas Duration comes from differentiation the YTM and bond equation
These two are used extensively to hedge the risks so you need to know them from their roots.

Then after these things we move to advanced areas like Financial Time series which is a part of Quant Finance. 

FRA Swaps and other pricing in derivatives are imp
FI is easier nothign new as such

Reading each line still becomes very imp

Financial Reporting Analysis: Accounting for CFA Level 2



The area starts with 40 famous ratios. You need to by heart these rules.
Inventory and Long lived assets (first chap), I will also refer to old book

Three major divisions that will be new:
  1. Inventory & long lived assets 
  2. Intercorporate
  3. Employee
  4. Multi national
  5. Earning quality & Fin Ratios

These three needs to be taken care of aggressively.

Week 1 at CFA L2
Inter-corporate investment was taken for 4 days to talk about 3 types of investment that could be done.
Trading, held for maturity, Available for sale. 
It started with held for trading, etc to methods of consolidation based on Good will.
Investment, influence, and control are the three methods. Equity method vs consolidation, where there are 2 types partial goodwill, full goodwill method, where goodwill should be taken completely to take right value of the minority interest. MI is a very imp part of consolidation but it not there in partial or equity consolidation.

Week 2 for CFA L2
Started with foreign investment accounting, Multi national operations. Temporal and current are 2 methods that account for a subsidiary in another country.
Temporal and current methods are 2 methods, where balance sheet are current vs income is taking all the load for old balance sheet.
Hyper inflation and the effect during hyper inflation.  Also the chapter ends with the effect of ratios.

Ratio analysis will be important to see after each of these translations.

All these things will have an impact on ratios which can be the questions in the exam.

The quality and analysis part in study session in 7 will be the most important and interesting.

Areas you should revisit:
Pooling on interest and balance sheet after these activities

Week 3 CFA Level 2
Pension and funds, implication of Financial ratios 

My strategy:
  1. Listen Schw Videos
  2. Listen allan (if good enough)
  3. Read Core Readings
  4. Discuss with roommates
  5. Try for Coaching

Ratios test:
  1. Use of reserves and surplus
  2. Solvency ratios when dilemma
  3. Proprietary ratio: a term used in India but means the same
  4. Bank over draft
  5. Days turnover research
  6. Ratios given with linear equation

CFA Level 1 Overlap with CFA Level 2 2012
LIFO FIFO and ratio effect
Long lived assets part

Pension funds and PBO (CFA Level 2):
I studied pension fund in a 3 hour class, where it first started with how to discount all future pension so that they can be expensed at the current Income Statement. Then the expense of some other activity like rate change / management or actuarial / discount factor needs to be adjusted in OCI. Current service cost and interest expenses are expensed in the income statement. Now the money invested needs to be realized at fixed return and more/less return again needs to be put in the OCI. In this we had questions where the data was given of expense, actuarial change, excess return, change in pension obligation etc and we have to find the right answer. This was an interesting area to study as I came to know about the pension things and issues that a company has when it employs someone in USA.

Test on Financial Reporting analysis
Question on current method
NI averaging?
Common streak: A=L+C
Balancing sheet play

Benefit payed
Service cost

F-Stat derivation
Correlation into SE
Serial correlation vs heteroskedacity vs auto-correlation

Discussion with Vikas:
Company put some money in CTC is this the same what we are learning, is this the same expense or is it something different?
Service is the cost that is incurred when someone works for a year and that money is needed for the formula.

Test Analysis of FRA:
Question of 3 held till maturity, available for sale, trading and linking it to corporate investment for a big case-let. This questions also checks the 3 methods of inter corporate investment.
Another case of 3 things which goes where and how to move things here and there for maturity, avs, hft is thing that might give trouble.
The thing that can give me a little trouble was foreign investment rest all things are good till now. Doing questions from Scz will be enough.

A tricky area, and is applied in all other subjects

Wednesday, January 4, 2012

CFA Level 2 Equity & Corporate Finance

Abstract: Two of core finance areas for the CFA is Equity and Corporate, and much of Equity valuation depend on them.

Equity valuations like DCF & multiple based valuations comes in this area.
And the much talked about Investment banking comes in Corporate Finance.

4 areas of working are:
  1. DDM & FCF
  2. Multiples (Deriving the mathematical formula of multiples and when they are used) including EBITDA EV multiples which are again very interesting
  3. Residual Income (various models of RI, again formula derivation is imp)
  4. Private Company Valuation
These 4 pillar forms the base of equity research. The questions will require corporate Finance and Financial Reporting Analysis to compute free cash flows, or CFO through indirect method.
These question are also used a company during merger or spinoffs. I got a question in Finance exam, a case of merger and then spinoff where we have to use different models. Hence this question became a mix of M&A and Equity.

Spinoffs also use a lot of Equity valuation to decide the rates and ratios. In my question they used P/B multiple.

Some of the other things in Private Equity are covered in Alternative Assets.

FCFF Valuation on Excel:
  1. EBIT norm
  2. RnD
  3. Lease Conversion

FCFF Stages:
Price of Share

All things boil down to find out the EBIT and other parameters that grows over a period of time.

Investment Banking:
This area is the best, what I came to know from this area is investment banking is more of MBA which requires a lot of maturity, marketing and negotiation as synergy and such things are very subjective. Two methods were taken from FCFF from the accounting point of view, and other was based on market. Both of them were very interesting. Again multiple based valuation and other requires good accounting, and what I tend to believe is CFA is more about equity valuation and such kind of profiles. But today when I looked at the course of Mater of financial engineering from various sites I came to know that Financial Engg is less about Equity and more about risk and technical analysis.

Ratio in Equity valuation is another important areas: Multiple based valuations.

Two things that are tough to understand are Working capital and Capital Expenditure which needs to looked upon carefully in understanding the Free cash flows as most of them are from indirect methods.

They are sometimes known as trading and transaction multiples. EV multiples coupled with other reports helps a lot in investment banking where you are paying for control. EV is market cap+ debt - cash. Another interesting thing is patent valuation and adjust of items for EBITDA. This is most MnA we use the transaction multiples. Companies of same categories are tough to find. Normalization of earning is hence an important work to do. Also calendarization of statements is imp to do an apple to apple comparison.

Lagging and leading indicators terminology is often used.

It is all about EV multiples or transaction multiples from the past activities for IB.

Finance Interviews: Preparing Questions Strategy [Jobs]

This article will talk about the interview preparations. I do not have a great deal of experience but these things are based on my personal survey and observation. Kindly recheck and rethink on the points and decide things on your acumen.

There are many many sites which talk about this matter, and I have pointed my views and these are not the rules. Also check out other sites.

Areas of concern(topic List from Day 1):
Tell something about you
20 seconds 50%
Never assume
next question
Body language
Tone consistency
Hard-cored personality
Selling yourself
Strategic Exaggeration
Recent vs old achievement
Leveraged to strong areas
Quant maths
Rounds of Interview: Layers
Value for money
react vs respond
artificiality for selling
Battles are won in mind
Breaking the ice
women vs peer vs old men
Smiling at right times
Greeting at right times
Listen like Arvind K
Reactions and emotions not allowed
Correlated weakness
Games with no truth
Verbal Skills are imp like GMAT
Supply demand
Technical vs HR
Switching demand and supply

Supply demand in jobs: Arrow diagram of jobs means plotting supply and demand. Its a pure case of supply demand, hence if you go in a area where demand is less and supply is also less then that is a better strategy than going to supply more, demand area. This is my personal belief and my strategy. Because people are less also the demand is less there are chances of better negotiations.

Dealing with HR people:
HR people should be dealt with appropriately. There are various people and layers that decides your entry in an organization.  Much of things depends on your qualifications and the place you do your PG from, hence this becomes one area of negotiations even if you can do the job of more qualified people. Hence in this case CFA, FRM and other exams become very useful.

Company size decision
Small: No Big names, freedom, high pay, more learning that you can do
Big: Adds to resume, more extra stuff, foreign assignment, less learning from self

My questions for you are:
When HR says no more negotiations do they mean so?
How to catch mis-match in demand supply?
If you are getting better each day, how does too often switch matter?
(Example 2 yr exp in good company vs 1 year in 2, and clearing exams like FRM/GMAT in the break)
How really less are the Quant jobs in India? (I think 90% is in Mumbai)
How to increase the interview count, how to move from Door to Door when email does not work?

Solutions and Discussions (day 2 of session)
Memorize all answers
Learn about job, role and sector
2-3 minutes is what it matters
Positive mind,  never react when forced to, take deep breath when angry or nervous
Learn to lie, this is game of demand and supply
Emphasis on knowing Research, Analysis, Reporting or which role that is
What can you do that others cannot do
First 6 months are tough with no Saturday and that is all right with you
Least attractive: Political and diplomatic answers
All negative answers: deal politely
Do not condemn others, talk about yourself only
Desire to progress/ recognition when due/ opportunity and suitability/ applying myself/ diversification / team working/ synchronized research / etc are reasons to join
Be open minded
Psychology of interviewers
Definition of position or works that you need to know, do you know this?
Different types of analyst
Working on tough past
again understand the profile very carefully
Ask them in a very soft and humble way
How long would you like to work with us
Do you know how to deal with company politics / backstabbing / trust deficit
Avoid words like until/unless/my opinion
Over Qualified answer
Standard questions and answers
Falsehood and lying with HR
Ego issues in job
Goals and targets
3 failed ventures
Websites of interview Questions

Consultants are also important and they can be contacted at a later stage

Developing Financial Acumen:
Looking at news and presentations
Great men says
Macro Economics
Reading news

Salary Negotiations:
Do not utter your figure
How to ask for more
Hinting the opportunity cost
Asking about profile
Big vs Small company

Small errors
Over agressive and over exerting
Preacher, giver of more that is needed

50 Standard Questions of HR:
Memorize all of them
Greatest weakness

What to ask them in the end:
Exact Profile
CFA FRM study leave
Relocation issues
Read about company
Guess supply demand
Body Language like nodding

Find company info
How to develop
Spirituality Link

Technical questions in Finance interviews:
Financial ratios (to find out problems in the company with balance sheets)
Valuation of companies CFA level 2
Modeling used in the industry

Questions in Quant finance jobs are very different:
I downloaded some books, and will share the names

Technical questions for Investment Banking / Equity valuation:
  1. FCF/DCF
  2. Enterprise Value
  3. Ratio modeling / Price to book ratio
  4. Footnotes auditor's report n Management Discussion
  5. Du-point analysis

Different Version of Resumes
Once you know how many areas you want to go in, then according to need you can change your resume. Hence for that you should have different version of resumes. The areas that you need to cover are:
  1. Credit / Market Risk/ Quant Resume FRM L2
  2. Equity Research / Investment Banking / Private Equity Resumes CFA L2
  3. Algorithmic Trading / Quant Resume FRM / CMT
  4. Derivative Analyst /  Derivative Trading / Generic Trading FRM / CMT
Hence you should have at-least 4 version of resumes.

Salary things
10 times factor
Symbiotic relations

Other strategic issues:
  1. Issues like bond, movement, absconding, etc must be taken care of before joining ideally.
  2. Company reimbursement of cfa frm exam fee
  3. Notice period buy-able 
  4. Getting in touch with peers is another important thing

Major banks that everyone in finance wants to work are:
  1. Citigroup Inc., Deutsche Bank AG, Goldman Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley and UBS AG
  2. As far as India goes most of them are in Mumbai or Bangalore.  
  3. Citi is in Mumbai, JP Morgan is in Mumbai, Goldman is in Bangalore, DB is in Mumbai and Bangalore, Morgan Stanley is in Mumbai, UBS is in Hyderabad, Barkley is in Mumbai.
KPOs in finance are:
  1. EVS
  2. Copal
  3. EXL
  4. Syntel
  5. etc

These questions are related to equity valuation
Career in Finance

I have discussed my view on the area of Interview. I am myself a juvenile in this area so this page should be taken as views rather than rules.