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Easy-to-read explanations for everything about Finance. Explore simplified breakdowns of the most complex concepts in corporate finance and financial markets.
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Debt Increase vs. WACC
What happens to WACC when debt increases?
Learn how different proportions of equity and debt in the total capital structure change the WACC.
Negative Working Capital
Working capital is the cash left over after a company meets its short-term obligations.
This means a negative number is bad, right? Wrong. Find out why net negative working capital can be a good thing.
EBITDA vs. Revenue
What’s the difference between EBITDA and revenue?
Learn what is revenue, what is EBITDA, how to calculate the two, and what’s the goal behind both measures. Also, do you know when to use an EBITDA multiple and not a revenue multiple?
Increase in Working Capital vs. Cash Flow
Why is an increase in working capital considered a cash outflow?
When calculating a firm’s free cash flow to then discount it and get to a valuation, we need to deduct increases in working capital. Why?
Forecasting CapEx
5 ways to forecast CapEx in a DCF model
No one can predict the future, but here are the best assumptions you can use to forecast CapEx. Also, check how CapEx and depreciation impact your terminal value.
How to Calculate MOIC
What’s the formula for the Multiple on Invested Capital (MOIC)?
Learn how the Multiple on Invested Capital is used in Private Equity to track fund performance.
Introduction to Asset Pricing
How do we value a risky cash flow?
This is a short post overviewing the challenge of asset pricing, and the different approaches there are to tackle it.
Expected Utility Theory
What makes an investor buy one asset over another?
Smooth consumption. Dominance. Choice theory under certainty. Choice theory under uncertainty. Expected utility theorem.
Constant Relative Risk Aversion
What is a CRRA utility function?
This is a guide containing 6 things you need in order to understand Constant Relative Risk Aversion.
Constant Absolute Risk Aversion
What is a CARA utility function?
This is an alternative to the CRRA utility function. Expand your knowledge of risk aversion coefficients, and learn why CARA is unrealistic.
Optimal Risky Portfolio
How can you get the most bang of return for your buck of risk?
Learn 5 things you need to know in order to understand optimal risky portfolios (also called tangency portfolio).
Commitment Approach vs. VaR
How can a UCITS fund calculate its leverage?
This post covers the steps a fund following the UCITS directive must take to disclose its leverage.
AIFMD vs. UCITS
What makes an AIF different from a UCITS fund?
This is a guide on the differences between alternative investment funds and UCITS funds, from leverage limits to investment strategies.
LDI Funds Leverage
Why do LDI funds use so much leverage?
Learn how LDI funds help pension funds hedge their entire risk with a smaller investment.
Net Asset Value and Assets under Management
Do you really understand the difference?
Although they are often treated as the same, there are some differences. Get a complete overview of when to use each.
Initial Margin vs. Variation Margin
What’s the difference between IM and VM in OTC derivatives trading?
This post covers everything you need to know about how margin reduces risk.
Potential Future Exposure
What is Potential Future Exposure?
Very similar to VaR but not quite the same. Learn how sell-side banks quantify the risk of selling OTC derivatives.
How to Calculate the VIX
How does the CBOE calculate the VIX?
This post will take you through 8 steps to understand how the fear index is calculated.
Ultimate Beginner’s Guide to Options
Over 40 million option contracts are traded every single day. But, what is an Option?
Calls, puts, ITM, OTM, intrinsic value, writing, payoffs, premium. What is all this jargon? Understand how options work.
Upper Bound of the Price of Puts
What’s the maximum price a put can reach? Why is this question important?
Learn how arbitrage opportunities explain the upper limits of European and American put options.
Protective Puts vs. Covered Calls
What’s the difference between a protective put and a covered call?
This is a complete guide on the key differences (and similarities) between the two option strategies.
One-Step Binomial Model
The one-step binomial model is the basis on which more complex models are built.
Want to master the basics? Start by understanding the logic behind binomial option pricing models.
Put-Call Parity with Dividends
What happens to put-call parity when a dividend gets in the mix?
Learn how to adjust put-call parity to accommodate for the payment of a dividend, whether it is discrete or continuous.
Hypothesis Testing in 5 Steps
Hypothesis testing is the main tool for statistical inference.
Understand how to formulate and decide on a Hypothesis Testing.
Correlation & Regression Analysis
How do you measure the statistical relationship between two or more variables?
Get a complete overview of Correlation and Regression analysis.
Strict Exogeneity
What is the strict exogeneity assumption in OLS?
This a guide on 4 essential things you must understand about handling coefficient unbiasedness.
Latest Posts
- Why LDI Funds Use Leverage (Pension Fund Hedging)LDI funds leverage themselves by getting into derivatives contracts. The goal is to cover the interest rate risk of the liabilities of their investors (defined-benefit pension funds). Even though pension… Read more: Why LDI Funds Use Leverage (Pension Fund Hedging)
- Repo vs. Securities Lending (SLAB): What’s the difference?A repo usually involves the sale of bonds in exchange for cash. The borrower is obliged to repurchase the bonds later. The bonds work as collateral for the lender. Securities lending… Read more: Repo vs. Securities Lending (SLAB): What’s the difference?
- Clearing Firm vs. Clearing House: Know the Difference?A clearing house stands between two clearing firms, typically big banks, in a trade. Clearing firms must follow a strict set of rules and regulations in order to engage in… Read more: Clearing Firm vs. Clearing House: Know the Difference?
- Potential Future Exposure: Definition, Calculation, ExamplePotential Future Exposure estimates the most you can win in a trade within a given timeframe and with a given confidence level. By extension, it tells you the most your… Read more: Potential Future Exposure: Definition, Calculation, Example
- AIFMD vs. UCITS: Definition, Rules, Leverage CalculationIn Europe, investment funds are typically structured under the UCITS directive (Undertakings for Collective Investment in Transferable Securities) or as an Alternative Investment Fund (AIF) under the Alternative Investment Fund… Read more: AIFMD vs. UCITS: Definition, Rules, Leverage Calculation
- NAV vs. AuM: Do You Understand the Difference?AuM is the total market value of the assets an asset manager oversees on behalf of its investors. It includes stocks, bonds, and cash within the funds the asset manager… Read more: NAV vs. AuM: Do You Understand the Difference?