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CFA Updated
How does a longevity swap work for pensions?
A longevity swap pays the plan net cash if retirees live longer than expected. Plan pays fixed expected mortality flows, receives actual. For Westmere Larkton with $2B swap, if actual deaths fall short of expected, plan receives the shortfall. Insurance margin adds 3-5% to expected flows.
How does a pension risk transfer buy-in differ from a buyout?
A buy-in has the insurer pay the plan (annuity held as an asset); the plan still pays participants. Legally the sponsor keeps the obligation, unlike a buyout. Useful for phased de-risking, flexibility, and preserving legal recourse if insurer fails.
Why has productivity growth slowed since 2005?
Productivity slowdown explanations include measurement error, diminishing returns to R&D, declining business dynamism, weak investment, and incomplete IT diffusion.
What causes revisions to potential GDP estimates?
Potential GDP revisions come from labor force and productivity updates; lower potential growth worsens fiscal sustainability and lowers r-star.
Why is output gap measurement so uncertain?
Output gap uncertainty arises from unobserved potential GDP, data revisions, end-point issues, and NAIRU uncertainty—practitioners triangulate using multiple methods.
Why has the Phillips curve flattened in recent decades?
The Phillips curve flattened due to anchored expectations, globalization, weakened labor bargaining, and measurement changes—but 2021-2023 reflation shows it can steepen under shocks.
How do I use a decision tree to value a staged capital project?
Decision trees are essential when projects have sequential decisions and information arrives in stages...
What are the primary estate tax minimization strategies for high-net-worth clients?
Estate tax tools: annual exclusion, lifetime exemption, GRATs, SLATs, ILITs, charitable trusts, and FLP valuation discounts...
What is the mosaic theory in CFA ethics, and how does it differ from trading on material nonpublic information?
The mosaic theory permits analysts to form material investment conclusions by combining public information with individually non-material nonpublic information. The critical distinction is whether any single piece of nonpublic information is material on its own — if it is, trading on it violates Standard II(A).
How are environmental liabilities recognized and measured under IFRS and US GAAP, and what should analysts look for in the disclosures?
Environmental liabilities are recognized when probable and estimable, but IFRS uses expected value measurement while US GAAP uses the range minimum when no single estimate is best. This creates significant cross-framework differences in reported liabilities for identical environmental obligations.
How do you value an interest rate swap after initiation? I can't figure out which leg to discount at which rate.
Swap valuation is really bond math in disguise. A plain vanilla swap for the fixed-rate payer equals a long floating-rate bond minus a short fixed-rate bond. After rates change, you discount remaining fixed payments at new spot rates and compare to the floating leg, which resets to par on each coupon date.
What is contingent immunization, and how does the cushion spread determine the manager's freedom to actively manage?
Contingent immunization allows active bond management while the portfolio maintains a surplus over the immunization floor. The cushion spread — the difference between the immunized rate and minimum acceptable return — determines the manager's freedom, and when the cushion is exhausted, the manager must lock in pure immunization.
Why are bearer plants excluded from IAS 41 and treated under IAS 16, and how does this affect measurement?
Bearer plants were excluded from IAS 41 and placed under IAS 16 because they function like productive equipment rather than consumable biological assets. They are measured at cost or revalued amount with depreciation, while their produce remains under IAS 41 at harvest.
What are samurai bonds and how do they fit into the global bond market taxonomy?
Samurai bonds are yen-denominated bonds issued in Japan by non-Japanese entities. They belong to a family of foreign bonds (yankee, bulldog, maple, etc.) named after the domestic market. Issuers choose samurai bonds for Japan's low rates and access to its large institutional investor base.
How is the quality factor defined in equity investing and which metrics best capture it?
The quality factor captures companies with strong fundamentals — high profitability, stable earnings, low leverage, and responsible payout policies. While no single definition exists, academic work by Novy-Marx and Asness provides frameworks using gross profitability, growth, and safety metrics.
How do traders interpolate across the volatility surface when there's no quoted option at the exact strike and maturity they need?
Volatility surface interpolation fills gaps between observed option implied volatilities across strike and maturity dimensions. Strike interpolation is typically done in delta space; time interpolation must be done in variance space to prevent calendar arbitrage.
How does a total return swap on a bond work, and why would someone use it instead of buying the bond outright?
A total return swap transfers the full economic return (coupons plus price changes) of a reference bond from the payer to the receiver, in exchange for a floating rate plus spread. It provides leveraged, off-balance-sheet synthetic bond exposure.
How does duration matching work for immunizing a liability, and what are the conditions for it to work?
Duration matching immunizes a portfolio by setting the Macaulay duration of assets equal to the liability horizon. Three conditions must be met: duration match, present value match, and convexity minimization. The strategy assumes parallel yield curve shifts and requires periodic rebalancing.
How do activist hedge funds use 13D filings to push for change, and what are the valuation effects?
A 13D filing signals activist intent when a fund crosses the 5% ownership threshold. Activist campaigns typically push for capital returns, operational improvements, or strategic alternatives, generating 5-8% announcement returns on average.
How does the low-volatility anomaly contradict CAPM, and why hasn't it been arbitraged away?
The low-volatility anomaly shows that stable, boring stocks deliver better risk-adjusted returns than volatile ones, contradicting CAPM. It persists because of lottery preferences, leverage constraints, benchmarking pressure, and agency problems in the asset management industry.
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