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How do swap mechanics actually work from trade date through final settlement?
A swap is a bilateral contract exchanging cash flow streams. Meridian Pacific enters 5-year $100M IRS with Beacon Bank: pays 4.20% fixed semi-annual, receives SOFR+15bp quarterly...
How is the Net Stable Funding Ratio computed and why is the horizon one year?
NSFR = ASF / RSF ≥ 100%. ASF weights liabilities by stability, RSF weights assets by required funding. Addresses year-long structural mismatch beyond LCR.
What's the difference between a conduit CMBS and a single-borrower CMBS?
Conduit CMBS are diversified 50-80-loan pools; SASB deals are concentrated on one asset with intense underwriting; CRE CLOs are managed pools of transitional bridge loans.
Why does diversification fail during crisis periods?
Diversification is a feature of normal market regimes. During crises, three mechanisms collapse it - liquidity stress, hidden factor exposure, and funding contagion...
How do I quantify the impact of a 50bp spread widening on my bond portfolio?
Use spread duration: loss equals -spread duration x spread change x market value. A $480M portfolio with 5.8-year spread duration loses about $13.9M on a 50bp widening. Add convexity and consider non-parallel moves for precision.
What is credit spread risk and how does it differ from default risk?
Credit spread risk is the risk that market-implied spreads widen causing mark-to-market losses even without default, while default risk is the actual failure to pay. A BBB bond on Meridian Cascade Industries can lose 6% from spread widening alone.
What does a conceptual soundness review actually cover?
Conceptual soundness review evaluates theoretical basis, assumption appropriateness, data quality, feature selection, estimation, limitations, and alignment with use.
How does the DuPont decomposition of ROE work? I need both 3-factor and 5-factor versions.
DuPont analysis breaks ROE into fundamental drivers. The 3-factor version decomposes ROE into profit margin, asset turnover, and leverage. The 5-factor version further separates tax burden and interest burden.
Is current yield ever misleading? When should I NOT rely on it?
Current yield is the quickest bond income metric but it has significant blind spots. It fails for deep discount bonds, short maturities, callable bonds, and floating-rate notes. YTM is generally the superior total return measure.
How do I compute a forward swap rate from the discount factor curve?
Forward swap rate = (DF_start - DF_end) / sum of tau x DF. Derived from the discount factor curve; it's the ATM forward strike.
What is the accounting framework for business combinations under IFRS 3 and ASC 805?
A business combination occurs when an acquirer obtains control of one or more businesses. Under both IFRS 3 and ASC 805, the acquisition method is mandatory. Key steps include identifying the acquirer, determining acquisition date, and recognizing assets at fair value...
How do strap and strip strategies express asymmetric volatility views?
A strap is long 2 calls + 1 put at the same strike, creating a volatility-long position with bullish tilt. A strip is long 2 puts + 1 call with bearish tilt.
How do autoencoders learn compressed representations of financial data?
An autoencoder compresses input to a low-dimensional latent vector and reconstructs it; high reconstruction error flags anomalies or novel patterns.
How do I compute and interpret Economic Value Added (EVA)?
EVA measures dollar value creation after charging for the full cost of capital. It equals NOPAT minus a capital charge.
Why is an FRA settled with a discounted cash payment at the start of the loan period?
The discounting quirk trips up nearly every candidate. The economic exposure of an FRA is to the interest that would accrue over the future deposit period, but settlement happens at the start of that period, not the end.
How is a forward rate agreement (FRA) priced and what does the fixed rate represent?
A forward rate agreement is essentially a bet on a future short-term interest rate. When Nordheim Capital quotes you a 3x9 FRA at 4.85%, they're offering to lock in the 6-month rate that will prevail 3 months from today.
Can someone walk through surplus optimization for a pension fund step by step?
Surplus optimization applies MVO to surplus returns (assets minus liabilities) rather than asset returns. The key insight is that assets highly correlated with liabilities reduce surplus volatility, making long-duration bonds especially valuable for pension funds even with modest expected returns.
What is the total risk ERP approach and when should I use it?
Total risk ERP = Mature ERP × (σ_country / σ_mature). Use for undiversified investors, private firms, or segmented markets. For Pampas Roja in Argentina: 5% × (42/16) = 13.13%. Use systematic ERP for diversified global investors...
How do IFRS 13 and ASC 820 differ in fair value measurement?
IFRS 13 and ASC 820 are substantively converged: both use exit price, three-level hierarchy, and highest-and-best-use. Differences exist in portfolio measurement, NAV expedient, and day-one gain treatment.
How does a BARRA-style fundamental factor model work?
BARRA-style models use observable firm characteristics as factor exposures and back out factor returns via cross-sectional regression each period.
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