EconomicsInflation  Demandpull inflation: Demand↑→GDP↑→unemployment↓→wages↑→supply↓→price↑
 Costpush inflation: Wage/energy price↑→supply↓→GDP↓→price↑
 Government anticipation: inflation↑→price↑→money value↓ wage↓
 Phillips curve: inflation X/ unemployment
Earnings multiplier (P/E)  microanalysis approach: P/E = (D/E)/(kg)
Foreign exchange  Purchasing power parity: derived from difference in cost of goods
 Interest rate parity
 Balance of payments: current acct. + financial acct. + official reserve = 0
 monetary policy → currency depreciation → ↑current acct. → ↓financial acct.
 fiscal policy → ↑currency → ↓current acct. → ↑financial acct.
 Relative PPP: depends on inflation rates between the two countries
Forward discounts & premiums = %forward rate surplus / spot rate * (360/#forward contract days) Currency appreciation & depreciation causal factors  X/ ∆ income growth e.g. faster growth → currency depreciation
 // ∆ inflation rates
 X/ ∆ real interest rates
 Expansionary monetary policy
 rapid economic growth → stimulates imports
 ↑inflation rate → ↑domestic product prices → reduces exports
 ↓real interest rates → ↓foreign investments
Fixed Income Accrual bonds: sold at par, coupon interest build up, no coupon payments
 Floating rate securities: coupon payment based on a specified interest rate or index
 Treasury Inflation Protected Securities (TIPS): coupon rate fixed, face value adjusted semiannually on CPI
 limits with cap, floor, and collar
 Embedded options
 call: issuer's right to retire
 prepayment: issuer's right to repay ahead of scheduled repayment
 put: owner's right to demand principal repayment
 repurchase(repo) agreement
Risks  Duration =  avg.(%Δ price) / Δ I/y
 Convexity: degree of curvature
Yield Spreads  Bootstrapping: price = sum of discounted coupons and parvalue
 nominal spread: amount premium to Treasury I/R
 Zero volatility spread: slope which makes the yield curve a straight line, consistent difference between different periods
 Optionadjusted spread = Zspread  %option cost
Et CeteraAlternative investments  openend fund: stands ready to redeem shares at any time during regular market hours at endofday NAV
 closedend fund: traded after IPO
 ETF fund: diversified portfolio with lower trading volume
 Hedge fund
 Commodities
Risk Management  Confidence intervals(normal distribution): 1σ=±1=68%, 2σ=±1.96=95%, 3σ=±2.58=99%
 Student's tdistribution: degrees of freedom=sample size
 Hypothesis testing: value at risk calculated by setting outliers as H_{0}
Derivatives  Forward contracts: deliverable, cash settlement, forward rate agreement
 FRA payment to long at settlement = notional principal * (floating rate  forward rate)%days / (1+floating rate)%days
 Futures: exchangetraded, margin, marking to market
 Options
 Call: long has right to buy
 Put: long has right to sell
 American options: executed anytime
 European options: can only be exercised at expiration
 PutCall parity: C + X/(1 + R_{F})^{T} = S + P
 Swaps: offsetting contracts, swaption(:option to enter into an offsetting swap)
 Plain Vanilla I/R swap = swap fixed rateLIBOR_{t1} * %days * notional principle
 currency/equity swaps: settled on forward prices
Asset pricing models  Capital market line: series of optimal earnings:risk relationship, function of σ
 Security market line: total risk = systematic + unsystematic risk (CAPM), function of β
