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(a) Prior to FAS 133 if companies qualified for hedge accounting their hedges were assumed to be perfect-no valuation or testing required. Currently under FAS 133 risk managers seeking hedge accounting treatment have to thoroughly document every hedge from the outset and explain why they are undertaking the transaction. They have to spot their derivatives to market every quarter no small feat for many instruments afterwards prove they are effectively hedging the underlying exposure.
It's this logic of having to pay for the sins of others that accounts for the deep resentment toward FAS 133. Several finance executives suspect the new rules have less to do with improving financial statements than with discouraging treasury departments from speculating with derivatives.
(b) Constructing synthetic swaps will engage replication of a swap by portfolios of bonds. These do not come under the considerations of FAS 133.
Application: Critiquing a Qualitative, Quantitative, or Mixed-Methods Study Over the last several weeks you have explored many qualitative, quantitative, and mixed-methods rese
Security returns are found to be less correlated across countries than within a country. Why can this be? Answer: Security returns are less correlated possibly because countries
2. Suppose a 12% coupon bond sells at par today; and three years from today, the required rate on the same bond is 8%. What is the coupon rate on the bond today and what will it be
Profitability Ratios Profit Margin It is a measure of the profit margin of the company. This is important to gauge the financial position of the company.
1. Why do you think you are asked to perform valuation given an array of discount rates? a. Would it not be more accurate to utilize, for example, CAPM to calculate cost of equi
a) Year 2 ROCE = $400k / $1,000k = 40% Year 1 ROCE = $360k / $800k = 45% b) ROCE is an efficiency ratio that measures the monetary performance of a firm compared with the amo
Bridge Financing A type of short-term financing used to cover an organization short-term want; a loan that is expected to be repaid relatively fast.
Why would an analyst use the Modified Du Pont system to calculate ROE when ROE may be calculated more simply? Explain. In fact, an analyst would not use the Modified Du Pont equ
What is working capital? Working capital contains the current assets of the firm.
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