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CFA Level II Updated
What is a day one P&L gain and when can it be recognized?
Day one P&L arises when fair value differs from transaction price at initial recognition. IFRS 9 defers the gain/loss if Level 3 inputs are significant; US GAAP typically calibrates models to zero it out.
What's the difference between recurring and non-recurring fair value measurements?
Recurring fair value is measured every period (trading securities, derivatives). Non-recurring is measured only when triggered (goodwill impairment, asset held for sale, loan write-down).
What standards define board independence and why does it matter?
Board independence requires no material relationship with the company beyond directorship; jurisdictions differ but all test employment, family, and commercial ties.
How do distressed debt funds actually make money?
Distressed debt investors buy claims trading below intrinsic recovery value and realize the gap through restructuring, par recovery, or converting debt into post-reorg equity.
How do I set up and interpret dummy variables in a regression?
For a categorical variable with k levels, you include k−1 dummy variables in the regression (the omitted one becomes the reference category).
How do interaction terms in multiple regression change how I interpret coefficients?
Interaction terms change the interpretation fundamentally: a coefficient on a main effect no longer represents the total effect of that variable because part of the effect now runs through the interaction.
How do I evaluate the character, collateral, and covenants in credit analysis?
Character = management track record, ethics, creditor treatment. Collateral = security with LTV and priority analysis. Covenants = legal protections (maintenance vs incurrence). For Glenmore Retail: mixed character, 67% LTV, weakened post-2024 covenants...
When is a long straddle the right trade and how do I structure it?
A long straddle profits from large moves in either direction — ideal for binary events, but vulnerable to volatility crush if the expected move is already priced in.
How does the wheel strategy work and when should you roll the options?
The wheel cycles between cash-secured puts and covered calls — rolling extends duration and manages delta when trades move against you.
When should a company elect the fair value option for financial instruments?
FVO lets entities measure eligible financial instruments at FVTPL to eliminate accounting mismatch, match fair-value-managed portfolios, or avoid embedded derivative separation. Election is irrevocable at recognition.
What is de facto control and when must I consolidate below 50%?
De facto control arises when an investor with minority voting rights has practical ability to direct relevant activities because other votes are dispersed or passive. 38% with 3,400 dispersed retail holders typically constitutes control...
What are CDX and iTraxx indices and how do investors use them?
CDX and iTraxx are standardized CDS indices providing diversified credit exposure across baskets of reference entities. CDX covers North America, iTraxx covers Europe and Asia...
How do I interpret factor loadings in practice?
A factor loading is the correlation between the observed variable and the latent factor. Magnitude above 0.70 is strong, 0.40 to 0.70 moderate...
Why is the price-yield relationship for vanilla bonds asymmetric even without options?
The bond price formula is non-linear in yield. The exponential denominator produces a convex curve where rallies gain more than equal-size sell-offs lose.
How is FLEV defined in Penman's framework vs traditional D/E?
FLEV = Net Financial Obligations / Common Equity, netting cash against debt. Borealis's 0.60 captures true financing risk. Appears in Penman's ROE = RNOA + FLEV x (RNOA - NBC), properly isolating operating vs financing performance.
How does net investment hedge accounting work for foreign subsidiaries?
Net investment hedges protect against FX translation exposure on the parent's investment...
How do fair value hedge entries differ from cash flow hedges?
Fair value hedges run both the derivative and the hedged item through P&L immediately...
When should I use a no-arbitrage model vs an equilibrium model?
The choice hinges on purpose: pricing vs. forecasting. No-arbitrage models ensure market prices are reproduced exactly.
How is the Hull-White model calibrated to match the observed yield curve?
Hull-White has dynamics dr = (theta(t) - a*r)dt + sigma*dW. The function theta(t) is chosen so that model bond prices match market prices.
What's the practical difference between primary and secondary markets for investors?
Primary markets raise capital for issuers; secondary markets redistribute ownership. The secondary market prices guide IPO pricing, discipline managers, and determine cost of capital.
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