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CFA Level II Updated
What is the accounting framework for business combinations under IFRS 3 and ASC 805?
A business combination occurs when an acquirer obtains control of one or more businesses. Under both IFRS 3 and ASC 805, the acquisition method is mandatory. Key steps include identifying the acquirer, determining acquisition date, and recognizing assets at fair value...
How do strap and strip strategies express asymmetric volatility views?
A strap is long 2 calls + 1 put at the same strike, creating a volatility-long position with bullish tilt. A strip is long 2 puts + 1 call with bearish tilt.
How do autoencoders learn compressed representations of financial data?
An autoencoder compresses input to a low-dimensional latent vector and reconstructs it; high reconstruction error flags anomalies or novel patterns.
How do I compute and interpret Economic Value Added (EVA)?
EVA measures dollar value creation after charging for the full cost of capital. It equals NOPAT minus a capital charge.
Why is an FRA settled with a discounted cash payment at the start of the loan period?
The discounting quirk trips up nearly every candidate. The economic exposure of an FRA is to the interest that would accrue over the future deposit period, but settlement happens at the start of that period, not the end.
How is a forward rate agreement (FRA) priced and what does the fixed rate represent?
A forward rate agreement is essentially a bet on a future short-term interest rate. When Nordheim Capital quotes you a 3x9 FRA at 4.85%, they're offering to lock in the 6-month rate that will prevail 3 months from today.
What is the total risk ERP approach and when should I use it?
Total risk ERP = Mature ERP × (σ_country / σ_mature). Use for undiversified investors, private firms, or segmented markets. For Pampas Roja in Argentina: 5% × (42/16) = 13.13%. Use systematic ERP for diversified global investors...
How do IFRS 13 and ASC 820 differ in fair value measurement?
IFRS 13 and ASC 820 are substantively converged: both use exit price, three-level hierarchy, and highest-and-best-use. Differences exist in portfolio measurement, NAV expedient, and day-one gain treatment.
How should I analyze director and key management compensation disclosures?
IAS 24 splits KMP pay into short-term, post-employment, other long-term, termination, and share-based payment. Map each bucket to incentive alignment — cash bonuses on revenue encourage channel stuffing while performance shares on ROIC align better...
What must be disclosed under IAS 24 Related Parties and why does it matter for analysts?
IAS 24 requires disclosure of relationship nature, transaction amounts, outstanding balances, terms, collateral, and bad debt provisions. Related parties include parents, subsidiaries, associates, JVs, key management, and close family...
How does an amortizing swap match a mortgage portfolio's declining notional?
An amortizing swap has a declining notional schedule that matches a reference amortization. The par fixed rate differs from a vanilla swap of equal maturity...
How does maximum likelihood estimation work in finance?
MLE finds parameters that maximize the probability of observing your sample. For a model f(x|theta), the likelihood is the product of f(x_i|theta)...
How do I apply LCNRV at the individual vs group inventory level?
Apply LCNRV at individual SKU level when practical — grouping allows gains to mask losses. Nordwind's individual write-down is $70K vs $30K group approach, which would understate impairment by $40K.
When is a company a principal vs agent, and why does gross vs net revenue matter?
The principal vs agent determination hinges on who controls the specified good or service before transfer. Principals record gross revenue; agents record only net commission.
How do I choose between input and output methods for long-term contract revenue recognition?
Under IFRS 15 and ASC 606, progress toward satisfying a performance obligation over time can be measured using either input methods or output methods. The choice should faithfully depict the transfer of control.
What is selection bias in finance studies?
Selection bias: sample not representative of population. PE's 14.2% IRR drops to ~10.5% after correcting for reporting, backfill, and NAV smoothing biases.
How do I analyze the tax burden component of DuPont and what signals trend changes?
Tax burden shifts flag changes in ETR — investigate via rate reconciliation, geographic mix, discrete items, and law changes before concluding it's structural.
How do I compare short-term borrowing costs across alternatives?
Every short-term funding source has a stated rate plus fees and conditions that change the effective cost.
How do you invest in consolidation-stage industries?
Invest in consolidators with strong balance sheets, scale advantages, M&A track record, and disciplined capital allocation.
What is the asset swap spread and how is it used to assess relative value in fixed income?
The asset swap spread is the spread over SOFR earned by buying a bond and swapping its fixed coupons to floating. It measures credit compensation from the perspective of a SOFR-funded investor and is widely used for relative value analysis, especially in European markets and basis trading.
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