Sciences‎ > ‎CFA‎ > ‎

CFA3 Basics



  • Demand-pull inflation: Demand↑→GDP↑→unemployment↓→wages↑→supply↓→price↑
  • Cost-push 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)/(k-g)

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

  1. X/ ∆ income growth e.g. faster growth → currency depreciation
  2. // ∆ inflation rates
  3. 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


  • Duration = - avg.(%Δ price) / Δ I/y
  • Convexity: degree of curvature

Yield Spreads

  • Bootstrapping: price = sum of discounted coupons and par-value
  • 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
  • Option-adjusted spread = Z-spread - %option cost

Et Cetera

Alternative investments

  • open-end fund: stands ready to redeem shares at any time during regular market hours at end-of-day NAV
  • closed-end 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 t-distribution: degrees of freedom=sample size
  • Hypothesis testing: value at risk calculated by setting outliers as H0


  • 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: exchange-traded, 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
    • Put-Call parity: C + X/(1 + RF)T = S + P
  • Swaps: offsetting contracts, swaption(:option to enter into an offsetting swap)
    • Plain Vanilla I/R swap = swap fixed rate-LIBORt-1 * %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