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How do you identify anti-dilutive securities and exclude them from diluted EPS?
Anti-dilutive securities increase EPS when included and must be excluded from diluted EPS. Options are anti-dilutive when exercise price exceeds market price. Convertible securities are anti-dilutive when their per-share impact exceeds basic EPS. Securities must be ranked from most to least dilutive and tested sequentially, stopping when a security increases diluted EPS.
How are non-monetary items restated under IAS 29 for hyperinflationary economies, and what triggers hyperinflationary designation?
Under IAS 29, non-monetary items are restated to current purchasing power using the consumer price index ratio before translation. The restated financial statements are then translated entirely at the current exchange rate.
How are financial assets classified under IFRS 9, and what determines whether gains go through P&L or OCI?
IFRS 9 classifies financial assets into amortized cost, FVOCI, or FVPL based on two tests: the business model test and the SPPI (contractual cash flow characteristics) test. If cash flows are not solely principal and interest, the asset defaults to FVPL regardless of business model.
How do analysts assess whether a deferred tax asset is realizable?
DTA realizability depends on whether sufficient future taxable income will exist to use the deductions. Analysts evaluate positive evidence (history of profits, existing reversing DTLs, tax strategies) against negative evidence (cumulative losses, expiring carryforwards). Changes in the valuation allowance directly impact reported earnings and signal management's confidence in future profitability.
What are the key differences between IFRS and US GAAP for asset impairment testing?
IFRS uses a one-step test comparing carrying value to recoverable amount (higher of fair value less costs of disposal and value in use), while US GAAP uses a two-step test with an undiscounted cash flow screen first. The biggest difference: IFRS allows impairment reversal, GAAP does not.
How do dividend swaps let investors isolate dividend payment expectations?
A dividend swap pays the difference between realized index dividends for a calendar year and a fixed strike.
What does a correlation swap pay out and how do dispersion traders use it?
A correlation swap pays the difference between realized average pairwise correlation of an index basket and a correlation strike.
What causes a commodity futures curve to go into backwardation?
Backwardation occurs when near-dated futures trade above longer-dated futures, producing a downward-sloping curve. The immediate cause is always the same: convenience yield exceeds the sum of financing cost and storage cost...
What is convexity risk in bank assets and how is it measured?
Convexity risk is the second-order sensitivity of asset value to interest rate changes.
How does a total return equity swap replicate stock ownership without buying shares?
Total return equity swap transfers complete stock economics without ownership. Westbridge pays SOFR+85bp financing, receives dividends + price appreciation on 1.2M Ironwood shares...
How do banks backtest CVA models?
CVA backtesting is challenging because CVA is risk-neutral and forward-looking. Banks break backtesting into three components: exposure model backtesting (compare simulated EE to realized MtM), PD/credit spread backtesting, and CVA sensitivities backtesting via P&L attribution...
What should a Contingency Funding Plan contain?
A Contingency Funding Plan has governance, early warning indicators, funding options, scenario-action matrix, and testing. Activated when EWIs trigger.
What happens when a CMBS loan defaults at maturity — extension or modification?
CMBS special servicers extend, modify, DPO, or foreclose on defaulted loans. Senior investors favor quick resolution; subordinates favor extension. PSAs constrain servicer discretion.
What is lower partial moment and how is it used in risk measurement?
Lower partial moment of order n around threshold tau captures only downside deviations raised to power n...
How is the standardized CDS upfront payment calculated?
Upfront equals approximately (par spread minus fixed coupon) times risky PV01. For Castelwood at 210bp par with 100bp fixed coupon and 4.35 risky PV01, the buyer pays about 4.78 points upfront per $100M. Negative upfronts flip direction.
What is a conventional CDS spread and how does it differ from the par spread?
The conventional CDS spread uses the ISDA Standard Model with a flat hazard rate and fixed 40% recovery — it's standardized for comparability. The par spread more broadly can use a full term structure. Dealer quotes are conventional spreads.
How do we aggregate model risk across the enterprise?
Enterprise model risk aggregates through findings severity, tier distribution, limitation overrides, explicit reserves, and qualitative heat maps. No single scalar — structured combinations.
When and why do I use ANOVA instead of multiple t-tests?
ANOVA tests whether three or more group means are equal using a single F-test, avoiding the inflated Type I error rate from running multiple t-tests. The F-statistic compares between-group variance to within-group variance.
What is securitization and how do mortgage-backed securities (MBS) actually work?
Securitization is the process of transforming illiquid assets like individual mortgages into tradable securities. It involves pooling loans in a Special Purpose Vehicle and issuing tranched securities with different risk/return profiles.
What is a feedforward neural network and how does it process inputs?
Feedforward NN: input -> hidden layers -> output. Each neuron computes weighted sum + activation (ReLU). Learns non-linear interactions automatically.
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