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CFA Updated
What's the income statement difference between trading and available-for-sale securities?
Trading securities flow unrealized gains through P&L each period. AFS gains sit in OCI until disposal, then recycle into P&L.
How do option books manage vega across the volatility surface?
Net vega can look flat while term-structure vega is dangerously exposed. Aurelia Szabo's desk splits vega into buckets by maturity...
How does a terms-of-trade shock affect a country's currency?
Favorable terms of trade shocks raise national income, lift non-tradable prices, and appreciate the real exchange rate. Commodity exporters show this strongly.
What is a Type 2 non-adjusting subsequent event?
Type 2 events (post-year-end conditions) require disclosure but no adjustment. Summit Peak's February 2026 earthquake at Osaka plant disclosed with $68M estimate.
What is the corporate capital allocation process and how do firms prioritize projects?
Corporate capital allocation: maintenance, growth, M&A, R&D, dividends, buybacks. Prestwick Manufacturing allocates $340M FY26 with 10.4% hurdle, automation at 22% IRR prioritized...
How does the Hausman test choose between fixed and random effects in panel data?
Fixed effects and random effects both estimate panel data models, but they rest on different assumptions. The Hausman test formalizes the trade-off.
How are mining restoration costs capitalized?
Initial ARO recognized at PV of expected restoration costs; capitalized to the mine asset. Accretion expense grows liability; depreciation expenses the asset.
How do I evaluate whether a public company's audit committee is effective?
Evaluate independence, financial expertise, meeting frequency, tenure, auditor oversight (non-audit fees below 30%), and restatement history.
What are the main red flags that indicate low earnings quality or aggressive accounting?
Low earnings quality red flags fall into four categories: revenue manipulation (receivables growing faster than sales, bill-and-hold), expense manipulation (changing depreciation assumptions, capitalizing operating costs), cash flow divergence (net income persistently exceeding CFO), and balance sheet warning signs (inventory buildup, serial acquisitions).
What is veta and how does it affect long-dated option valuation?
Veta is the derivative of vega with respect to time, describing how a position's vol exposure decays as time passes.
What is an Intentionally Defective Grantor Trust (IDGT) and why is it called 'defective'?
An IDGT is a trust designed to be 'defective' for income tax (grantor pays tax) while effective for estate tax — enabling installment sales and tax-free appreciation.
How do returns and allowances affect inventory reporting?
Under ASC 606 and IFRS 15, expected returns reduce revenue at the time of sale through a refund liability, and the estimated cost of returned goods is recognized as a right-of-return asset.
How do transfer pricing adjustments affect multinational financial statements?
Transfer pricing is cross-border intercompany pricing required to be at arm's length. Northwind's $94M IRS adjustment likely triggers ~$30-35M total cash tax, interest, and penalties. Check MAP and APA status...
How do you compute the breakeven on a zero-coupon inflation swap?
A ZC inflation swap settles (1+K)^N vs CPI growth ratio once at maturity; K is the pure breakeven.
What is combination matching and why do pension funds prefer it?
Combination matching dedicates near-term liabilities (0-5 years) via cash-flow matching and immunizes longer-term ones via duration matching. Balances certainty with efficiency.
Can a company reclassify held-to-maturity securities and what are the consequences?
Impermissible sales taint the entire HTM portfolio, forcing reclassification to AFS and blocking new HTM designations for two fiscal years under US GAAP.
How do I construct a gamma-neutral portfolio?
Gamma neutrality requires another option, since the underlying has zero gamma. The recipe: offset your portfolio's gamma using a liquid option, then rebalance Delta back to zero...
What is the Balassa-Samuelson effect and how does it affect exchange rates?
Balassa-Samuelson says tradable productivity growth raises wages economy-wide, lifting non-tradables prices and real exchange rate. Key driver for convergence economies.
What is a Type 1 adjusting subsequent event?
Type 1 events provide evidence of year-end conditions and require adjustment. Willowbrook Foods adjusts $4.2M bad debt for BayMarket's February 2026 bankruptcy.
How do I make country allocation decisions within emerging markets?
EM country allocation combines valuation/momentum/macro/currency signals. Klimtgate Global Markets tilts +4% Korea, +3% Brazil, -4% China in April 2026 for 3.2% TE and 2.3% backtested alpha...
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