Financial Analysis
Financial Analysis
Financial Analysis
What is most accurate? A derivative
Which statement is false? Exchange traded securities
Arbitrage prevents
Equity forward
– Forward contract where the underlying asset is a single
stock or a portfolio of stocks, e.g. an index
– The stock seller can lock in the selling price of the shares
– Example: Forward contract on five stocks with a agreed upon (forward) price of $525,2 per stock in 100 days; the forward will be settled in cash. After 100 days the stock price is $535,7 --> pament for long position?
Payment = (535,7 - 525,2) x 5 = 52,5
Forward Rate Agreement (FRA)
settlement in 30 days, notional amount of EUR 1 Mio. borrowed for 90 days, based on 90 day LIBOR, specified rate of 5%. Assume that at settlement current 90-day LIBOR is at 6% --> market rate > specified rate -> long is positive
- Interest saving until end of the 90-day loan ?
- cash settlement ?
Party A (long) will receive EUR 50 Mio. in 3 months and enters into a cash settlement currency forward with party B (short) to exchange EUR for USD at USD 1,03 per EUR. The market exchange rate at settlement is USD 1,05 per EUR
- long position at settlement ?
The short in a deliverable forward contract
Consider a USD 2 million FRA with a contract rate of 6% on 60-day Libor. If 60-day LIBOR is 7 % at settlement, the long will
A dealer in the forward contract market
Example Margin Balance
- Long position of five wheat contracts and each contract covers 5.000 bushels
- Each contract requires initial margin of $150 and maintenance margin of $100
- Compute margin balance positions for a two-tick price decrease (per bushel) on day one, a one-tick increase on day two and a one-tick decrease on day three
Loss on day 1
= 5 x 5000 x (-$0.02) = -$500
The daily process of adjusting the margin in future account is called
In future markets, the clearinghouse does all of the following except
Four 125.000 Euro Futures are sold at a price of USD 1,0346. The next day the price settles at USD 1,0034.
Marking to market changes previous day’s margin by
+ USD 15.600
Moneyness
expl
Intrinsic Value of options
expl
Amount by which the option is in the money at payoff
- An option at-the-money or out-of-the-money has zero intrinsic value
- On expiration date of options the following holds
- Intrinsic value of a call option: Max(0;S-X)
- Intrinsic value of a put option: Max(0;X-S)
option value =
= intrinsic value + time value
Time Value of an Option
expl
Time value is the amount by which the option price exceeds the intrinsic value
A USD 48 strike price call on a stock trading at USD 50 is priced at USD 6. The time value of the option is
USD 4
A forward rate agreement is equivalent to the following interest-rate options
The payoff of an interest-rate option
Financial Analysis Framework
Context of the analysis --> Collected data --> Process data --> Analyze / Interpret --> Communicate Conclusion --> Follow up
Role of Financial Reporting
provide information about the companies performance, financial position and changes in financial position over the reported period
Primary Financial Statements (3)
- Income statement
- Balance sheet
- Cash flow statement
Secondary Financial Statements
- Statement of shareholder's equity
- financial notes and supplementary schedules
- management's discussion and analysis
- auditor's report
Standard-Setting Bodies + Reporting Standards (for region)
- USA: Financial Accounting Standards Board (FASB) --> United States Generally Accepted Accounting Principles U.S. GAAP
- EU: International Accounting Standards Board (IASB) --> International Financial Reporting Standards (IFRS)
IFRS Framework - Underlying assumptions
- Accrual Basis --> reflects business transactions when they actually occur not necesserarily when cash movements occur
- Going Concern --> refers to the assumption that the company will business for the foreseeable future
IFRS - Qualitative Characteristics
- Understandibility
- Relevance
- Reliability
- Comparability
Understandibility
info should be understandable to users with basic knowledge of business, economic activities, accounting, and who have the willingness to study the info with reasonable diligence
Relevance
influence of info at hand which must be material
Reliability
- faithful representation
- substance over form
- neutrality
- prudence
- completeness
Comparability
info should be presented in a consistent manner over time and between entities
Classification of Business Activities
- Operating activities --> day-to-day business functioning of an entity
- Investing activities --> acqusition and disposal of long-term assets
- Financing activities --> related to obtaining or repaying capital
Balance sheet provides info about
a company's financial position at a point in time
Income statement provides info about
a company's profitability over a period of time
Statement of cash flows provides info about
a company's cash flows over a period of time
Balance Sheet: Owner's Equity =
Assets - Liabilities
Income Statement: Net income =
Revenue - Expenses
Statement of cash flows: (delta)Cash =
CFI + CFF + CFO
Statement of shareholder's euqity provides info about
the composition and changes in owners' equity during a period of time
Statement of shareholder's euqity: Owners' equity =
Contributed Capital + Retained Earnings
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Lernkarten
Four 125.000 Euro Futures are sold at a price of USD 1,0346. The next day the price settles at USD 1,0034.
Marking to market changes previous day’s margin by
+ USD 15.600
Moneyness
expl
Intrinsic Value of options
expl
Amount by which the option is in the money at payoff
- An option at-the-money or out-of-the-money has zero intrinsic value
- On expiration date of options the following holds
- Intrinsic value of a call option: Max(0;S-X)
- Intrinsic value of a put option: Max(0;X-S)
option value =
= intrinsic value + time value
Time Value of an Option
expl
Time value is the amount by which the option price exceeds the intrinsic value
A USD 48 strike price call on a stock trading at USD 50 is priced at USD 6. The time value of the option is
USD 4
A forward rate agreement is equivalent to the following interest-rate options
The payoff of an interest-rate option
