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How does statistical arbitrage scale pairs trading to hundreds of positions?
Stat arb factor-neutralizes 1000+ stocks, trades residual mean reversion via optimizer. Sharpe 1.5-2.5 but crowded-trade risk is real.
How does a total return swap on bonds work and why is it called 'unfunded' credit exposure?
A total return swap passes all bond economics (coupons plus price changes) to the receiver in exchange for a funding rate. It is 'unfunded' because the receiver gains full economic exposure without purchasing the bond, enabling leveraged investors to obtain 10:1 or higher leverage ratios.
Can someone walk through EVA (Economic Value Added) with a detailed calculation and explain the accounting adjustments?
EVA measures profit after deducting the full cost of capital, including equity. Key accounting adjustments include capitalizing R&D, adjusting for operating leases, and excluding one-time charges. These adjustments can significantly change the EVA figure and improve cross-company comparability.
How do you determine whether a company should report revenue gross (as principal) or net (as agent)?
A company reports revenue gross as a principal if it controls the good or service before transfer to the customer. If it merely arranges for another party to provide the good/service, it is an agent and reports only its commission as revenue. Net income is unaffected.
What are the most important non-cash items that get adjusted in the cash flow statement, and where do they show up?
Non-cash items include depreciation, amortization, impairments, stock-based compensation, deferred taxes, bond discount/premium amortization, unrealized FX gains/losses, and gains/losses on asset sales. Each must be added back or subtracted in the indirect method to reconcile net income to actual cash flow.
When does GIPS require time-weighted vs money-weighted returns, and how do you calculate each?
GIPS has specific rules about return calculation methods, and the distinction between time-weighted return (TWR) and money-weighted return (MWR, also called internal rate of return or IRR) is a key exam topic.
What is an equity swap and why would a hedge fund be the total return receiver?
An equity swap exchanges the total return on an equity for a funding leg, typically SOFR + spread.
How do fixed-for-floating interest rate swaps work and who benefits from each leg?
A plain-vanilla interest rate swap exchanges a fixed coupon for a floating coupon on a notional principal that is never exchanged.
How do I price a commodity forward using the cost of carry model?
The cost-of-carry model for commodity forwards extends the financial forward formula by adding storage costs (u) and subtracting convenience yield (y). The continuous-compounding version is F = S e^((r + u - y) T)...
How do swap mechanics actually work from trade date through final settlement?
A swap is a bilateral contract exchanging cash flow streams. Meridian Pacific enters 5-year $100M IRS with Beacon Bank: pays 4.20% fixed semi-annual, receives SOFR+15bp quarterly...
How is the Net Stable Funding Ratio computed and why is the horizon one year?
NSFR = ASF / RSF ≥ 100%. ASF weights liabilities by stability, RSF weights assets by required funding. Addresses year-long structural mismatch beyond LCR.
What's the difference between a conduit CMBS and a single-borrower CMBS?
Conduit CMBS are diversified 50-80-loan pools; SASB deals are concentrated on one asset with intense underwriting; CRE CLOs are managed pools of transitional bridge loans.
Why does diversification fail during crisis periods?
Diversification is a feature of normal market regimes. During crises, three mechanisms collapse it - liquidity stress, hidden factor exposure, and funding contagion...
How do I quantify the impact of a 50bp spread widening on my bond portfolio?
Use spread duration: loss equals -spread duration x spread change x market value. A $480M portfolio with 5.8-year spread duration loses about $13.9M on a 50bp widening. Add convexity and consider non-parallel moves for precision.
What is credit spread risk and how does it differ from default risk?
Credit spread risk is the risk that market-implied spreads widen causing mark-to-market losses even without default, while default risk is the actual failure to pay. A BBB bond on Meridian Cascade Industries can lose 6% from spread widening alone.
What does a conceptual soundness review actually cover?
Conceptual soundness review evaluates theoretical basis, assumption appropriateness, data quality, feature selection, estimation, limitations, and alignment with use.
How does the DuPont decomposition of ROE work? I need both 3-factor and 5-factor versions.
DuPont analysis breaks ROE into fundamental drivers. The 3-factor version decomposes ROE into profit margin, asset turnover, and leverage. The 5-factor version further separates tax burden and interest burden.
Is current yield ever misleading? When should I NOT rely on it?
Current yield is the quickest bond income metric but it has significant blind spots. It fails for deep discount bonds, short maturities, callable bonds, and floating-rate notes. YTM is generally the superior total return measure.
How do I compute a forward swap rate from the discount factor curve?
Forward swap rate = (DF_start - DF_end) / sum of tau x DF. Derived from the discount factor curve; it's the ATM forward strike.
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...
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