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What is VWAP and why is it used as an execution benchmark?
VWAP is price weighted by volume across a period. It's a popular execution benchmark because it's passive-friendly, observable, and fair, though it doesn't capture impact from the trade itself.
What's the difference between implicit and explicit transaction costs?
Explicit costs are invoiced (commissions, fees, taxes). Implicit costs are embedded in execution prices (spread, impact, opportunity), typically dwarfing explicit for institutional size.
What does 'through the cycle' rating mean and why do agencies use it?
Through-the-cycle (TTC) ratings attempt to reflect an issuer's credit quality over a full economic cycle (5-7 years), smoothing out short-term volatility. Point-in-time (PIT) ratings reflect the current 12-month default probability given today's conditions...
How do you aggregate Greeks across a multi-instrument portfolio?
Portfolio Greeks sum linearly with quantity and multiplier. Net delta, gamma, vega per underlying, but watch for basis risk, exotic sampling noise, and cross-Greeks.
How does a PO strip behave and why is it called a leveraged rate play?
A PO strip receives all principal and no interest. Fast prepayments accelerate the par payoff, so POs gain sharply when rates fall — large positive duration and convexity.
How do antithetic variates reduce Monte Carlo variance?
Antithetic variates pair each random draw Z with its negative -Z, simulating two paths from each random number stream and averaging...
How does Merton's jump-diffusion model price options?
Merton's jump-diffusion adds compound Poisson jumps to Brownian motion. Option prices are Poisson-weighted sums of Black-Scholes prices, producing steep short-dated skew and fat tails.
How is concentration risk measured with the Herfindahl index?
HHI = sum of weighted exposures squared, flags concentration; Basel uses granularity adjustments when HHI exceeds thresholds...
How does DvegaDspot relate to vanna and why is it useful?
DvegaDspot equals vanna by the symmetry of mixed partial derivatives; both describe how vega and delta interact with spot and vol moves.
What is the Generation-Skipping Transfer (GST) tax and when does it apply?
GST tax applies at 40% to transfers skipping a generation, in addition to gift/estate tax — mitigated by the GST exemption allocated via Dynasty Trusts.
How should I analyze inventory held at third-party locations?
Inventory held at third-party locations belongs to the owner of control, which is usually the reporting firm. The physical location is irrelevant for accounting but highly relevant for risk.
What are the broader OECD tax reforms and how should I track them in equity analysis?
Beyond BEPS 2.0, monitor Pillar One (Amount A + B), Digital Services Taxes, CBAM, CARF, and Subject-to-Tax Rule. Expect multinational ETR to converge toward 17-19% by 2030, compressing tax arbitrage...
What does the Fama-French three-factor model add beyond CAPM?
Fama-French adds SMB (size) and HML (value) to CAPM, substantially improving cross-sectional explanatory power.
What are the main active management strategies in fixed income?
Active fixed income uses duration bets, curve positioning, sector rotation, security selection, and global rotation. Risk budgets allocate tracking error across bets; Campisi attribution measures sources of return.
What's the difference between the OIS curve and the swap curve?
Before 2008, practitioners used a single LIBOR curve for both forecasting and discounting. The crisis revealed LIBOR contains credit and liquidity spreads...
How do I distinguish cyclical sectors from defensive sectors in portfolio construction?
Cyclicals (discretionary, industrials, materials, banks, energy) move with GDP. Defensives (staples, healthcare, utilities, telecom) do not. Tech and REITs sit between.
What are vanna and volga and when should I care about them?
Vanna is the second partial derivative of option value with respect to spot and vol: dDelta/dSigma = dVega/dSpot. It measures how Delta changes when volatility shifts...
What is Dutch disease and how does it harm long-run growth?
Dutch disease is when a commodity boom appreciates the currency and hollows out manufacturing. Long-run growth suffers as productivity-heavy tradables disappear.
What is management's responsibility for the financial statements?
Management owns the statements, ICFR, estimates, and going concern assessment. CEO/CFO personally certify under SOX 302; ICFR attestation under SOX 404.
How do I handle capital rationing — when I can't fund all positive-NPV projects?
Capital rationing: maximize NPV not IRR. Quorrelton Industries picks A+C+D ($80M, $31.5M NPV) over naive PI-ranked A+B+D ($70M, $28M NPV) using integer programming...
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