Study Session 11

An overlong break during my break week plus the worst part of the studying (accounting) plus deteriorating study habits (March Madness anyone!?) plus distractions on the job (I'm trying to get into fixed income) have really thrown me off track.

The bottom line is, I'm going to stop making excuses and just change my habits towards getting more done during the week. I'm just cutting my losses and proceeding forward. I have seen that the remaining material is much easier, so I plan to cruise through it at a quick pace and get to the practice exams. There I can make up the most ground by focusing on my weaknesses. This will be the toughest part for me, as I am normally not that kind of specific studier. But I know that in the long run, it'll help a lot. It would also explain why I always seem to be above average but never perfect in exams.

Lastly, a really sound piece of explanation. The reason why Mutual Funds are really Investment Companies, and why CDO's create SPV's is the same - you want to be able to separate those assets from a company so that shareholders in the company do not have recourse to that money. In other words, you have to set up a separate entity to keep the accounting for the money separate.

If I haven't mentioned this already, there is a 2 day course given by one of the CFA teachers that comes highly recommended. This is the link to the web site:
http://www.accountingworkshops.com/leveli.htm

Study Session 10

Week off from studying was really good for clearing out the ol' cobwebs. I highly recommend it. Although I missed some of the rigor of having a set schedule, I have to say that the combination of hard studying and then perspective is really good.

So today I started to work on Study Session 10. The big theme seems to be that you get differences between the actual taxes payables that go to the IRS and what income tax expenses appear on the financial statements. So in order to reconcile those, you have to adjust the financial statements using either deferred tax adjustments or deferred tax liabilities. Some will revert when the timing/ accounting issue comes to pass, and some will be permanent.

Study Session 9

Recent news events helped reinforce some of the learnings from the SS on International Finance. A recent corrective drop in the Shanghai and Chezhen markets resulted in a lot of revisionist research on carry-trade. Carry-trade is the leveraging of lower foreign fixed interest rates. In real terms the Japanese Yen has a very low interest rate, which the government supports keeping low, the overall effect of which is to stimulate the Japanese economy and increase liquidity. But the same low interest rates encourage non-Japanese investors to borrow the Yen to leverage elsewhere, knowing that they won't have to pay a lot for the Yen. (This too should help the Yen because it appreciate domestically). In any case, the leverage is good unless the government unexpectedly raises interest rates (which it did, albeit a few months ago) and investors suddenly decide to reduce or repay those borrowings (which is part of the explanation for the correction - albeit in a different market). In any case, the principle behind all this, a relatively straightforward concept, but easily overlooked, is covered interest parity. And it is covered in our beloved textbook. Incidentally, if you go out and try to simulate or look for arbitrage opportunities using real life interest rates and forward/ spot rates, you might find that the numbers come out weird (as was my case). Then you might realize that you had totally forgotten the simple concept of direct vs. indirect quotes, and how it is not as intuitive as using DC/FC, although it is that simple.
Just some figures for laughs a/o March 2, 2007:
US interest rate: 5.25%
Japanese interest rate: 0.5%
Forward rate (DC/ FC, but meaning how many yen do i get for 1 USD dollar): 0.008889
Spot rate (DC/ FC): 0.008506

1+r d = forward(dc/fc)
1+r f spot (dc/fc)

generally, d> f, forward> spot