Community Q&A
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How do I construct a synthetic put from a call?
Synthetic put = long call + short stock + long bond paying K, from rearranging parity...
How do dividends create a case for early exercise of American calls?
Dividends create early-exercise cases for American calls when D > K*(1-e^(-rt))...
What is asset-liability management and why do banks need a dedicated ALM function?
Asset-liability management coordinates the structure of a bank's balance sheet so that interest rate, liquidity, and currency mismatches between assets and liabilities do not threaten earnings or solvency.
How do I calculate delta for a European call step by step?
Delta = N(d1) for a European call. Walk through a Brindle Motors example: d1 = 0.3247 gives delta ≈ 0.626, so hedge 1,000 calls with 626 short shares.
How is a pass-through security structured and what does the investor actually own?
A pass-through gives investors a pro-rata undivided interest in a mortgage pool. WAC is the gross mortgage rate; the pass-through rate is WAC minus servicing and guarantee fees.
How is the variance risk premium different from the volatility risk premium?
The variance risk premium is the gap between the variance swap rate K_var and expected realized variance. The volatility risk premium is the same idea in vol units.
How does netting reduce Exposure at Default for derivatives portfolios?
Netting offsets positive and negative MTMs across trades with one counterparty, reducing both current exposure and add-ons...
How is volga different from vega and when does it dominate P&L?
Volga is the second derivative of option price with respect to vol; it captures how vega accelerates as vol moves, dominating P&L during large vol shocks.
What is a revocable living trust and what are its main benefits?
A revocable living trust avoids probate, enables incapacity planning, and eases multi-state transfers — but provides no tax benefits or lifetime creditor protection.
What is days of inventory on hand and when should I use it?
Days of inventory on hand equals 365 divided by inventory turnover. For Harvest Coastal Foods with turnover of 9.1x, DIO equals 365 / 9.1 = 40.1 days.
What's the difference between current tax expense and deferred tax expense components?
Total tax expense splits into current (taxes legally owed this year, cash-based) and deferred (change in net DTL balance). For Helvica Pharma, $312M current plus -$25M deferred signals DTL reversal...
How do I value an existing swap partway through its life?
Replicate the swap as fixed bond minus floating bond and discount each leg on today's curve.
What is bond immunization and how does it protect against interest rate risk?
Immunization matches portfolio Macaulay duration to liability horizon so that price and reinvestment effects offset. Requires duration match, sufficient PV, and convexity greater than liability.
What is a beneficial conversion feature and how is it accounted for?
A BCF arose when a convertible's strike was below the stock price at issuance. Under ASU 2020-06 the model is largely retired, but legacy filings still show it.
What's the difference between absolute and relative purchasing power parity?
Absolute PPP equates exchange rate to price-level ratio. Relative PPP equates currency movement to inflation differential. Relative PPP holds better as a long-run anchor.
Is there a gain or loss when I reissue treasury shares above cost?
Treasury reissuance differences hit APIC, never the income statement. Larkspur Industries example with cost method shows the journal entries.
When can a parent avoid recognizing deferred tax on undistributed foreign subsidiary earnings?
The indefinite reversal exception under ASC 740-30 lets parents skip DTL recognition if earnings are demonstrably reinvested abroad — post-TCJA, it mainly covers withholding and state taxes.
How do I diagnose multicollinearity using the variance inflation factor?
Multicollinearity occurs when predictors are highly correlated with each other. The consequence is inflated standard errors, unstable coefficient estimates, and counterintuitive signs.
What is the step-zero qualitative test for goodwill?
Step-zero is an optional qualitative assessment. If not more likely than not that fair value is below carrying, skip the quantitative test.
How do companies reclassify investing activities into operating cash flow to look better?
Companies shift capitalized costs, trading securities, interest, sale-leasebacks, and factoring between CFO and CFI to inflate operating cash.
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