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How is economic value of equity (EVE) calculated?
EVE equals the present value of all banking-book asset cash flows minus the present value of all liability cash flows, with both valued at risk-free or OIS discount rates.
What's the difference between initial margin and maintenance margin?
Initial margin opens the position; maintenance margin is the minimum to keep it open. Falling below maintenance triggers a call back to the initial level.
How does daily mark-to-market work for futures?
Daily mark-to-market means the clearing house revalues each open position at settlement price and settles the P&L in cash the same day through margin accounts.
How do I calculate and interpret the Altman Z-score?
Edward Altman's original 1968 Z-score uses five ratios from public manufacturing firms: Z = 1.2·X1 + 1.4·X2 + 3.3·X3 + 0.6·X4 + 1.0·X5 where X1 = Working Capital / Total Assets (liquidity)...
Why does rho matter more for long-dated options and how do I compute it?
Rho measures sensitivity to interest rates. Long-dated calls have meaningful rho; short-dated options have nearly zero. Formula: ρ_call = K·T·e^(-rT)·N(d2).
How do CMO sequential-pay tranches redistribute prepayment risk?
Sequential CMOs pay principal to tranches in order (A→B→C→Z) while all classes receive interest. This creates time-segmented maturity profiles from one pool.
How do finite difference methods solve the Black-Scholes PDE?
Finite difference methods discretize the BSM PDE on a grid of stock prices and times, approximating derivatives with differences...
What does an inverted vol term structure signal?
Inverted vol term structure signals acute stress with mean reversion priced in. Front-month spikes to 40-60 while 1-year lags because long-run vol reverts to average.
How do I design a credit stress test for FRM Part II?
Design scenarios, map macro drivers to PD/LGD, project nine-quarter losses, and assess post-stress capital adequacy...
What is zomma and how does it connect gamma and volatility?
Zomma is the derivative of gamma with respect to volatility, describing how the gamma profile reshapes when implied vol shifts.
What is a grantor trust and how is it taxed differently from a non-grantor trust?
Grantor trusts are transparent for income tax — the grantor pays tax on trust income, effectively making additional tax-free gifts to beneficiaries.
When is an inventory build a bullish signal versus a warning?
An inventory build signals confidence only when paired with forward demand indicators. Without them, a buildup is a future writedown waiting to happen.
How do I value net operating loss (NOL) carryforwards and assess the valuation allowance?
NOLs create DTAs equal to NOL × tax rate. Crestvale's $840M NOL × 21% = $176M gross DTA, offset by $210M valuation allowance. For valuation, discount expected tax savings from NOL utilization against forecast income...
How does an OIS work and why has it replaced LIBOR swaps?
An OIS swaps fixed against compounded overnight SOFR and now serves as the risk-free benchmark for swap discounting.
What is contingent immunization and how does the cushion spread work?
Contingent immunization runs active management while cushion (portfolio minus PV of target at current rates) is positive. Triggers immediate immunization at zero cushion, locking in the target.
How are step-up coupon bonds accounted for on the issuer's books?
Step-up bonds use the effective interest method with a single YTM applied to accreting carrying value. Early periods accrete, later periods amortize.
How does covered interest parity work and when does it break down?
CIP forward to spot ratio equals interest rate ratio. Held tightly pre-2008 but now deviates persistently due to Basel III balance sheet costs.
What's the accounting difference between qualified and non-qualified ESPPs?
Qualified ESPPs (Section 423) are non-compensatory only if discount ≤5% and no look-back. Halcyon Labs Plan A (look-back) is compensatory at $10/share fair value.
What is a credit-duration swap and how is it used?
Credit-duration swap isolates spread exposure by hedging rate risk with Treasury futures or using CDX indices. Wesbourne AM earns $750K on 20bp spread tightening in $50M IG position...
How do I measure the tax benefit for an uncertain tax position using the cumulative probability approach?
Rank possible outcomes from highest to lowest benefit and accumulate probabilities — recognize the largest amount whose cumulative probability exceeds 50%.
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