GISI Securities Course Professional Level cheat sheet

Securities regulation in most jurisdictions rests on three pillars: disclosure (registration and ongoing reporting), antifraud (prohibition of misstatements and manipulation), and market-intermediary oversight (licensing, capital, and conduct rules).

Offerings are typically exempt from full registration where sales are limited to sophisticated or professional investors, or where aggregate proceeds fall below a prescribed threshold; resale restrictions then govern onward transfers.

Market structures range from quote-driven dealer markets (bid-ask spreads compensate market makers) to order-driven auction markets (central limit order book matches at price-time priority) and hybrid structures combining both.

A continuous two-sided market requires market makers or designated liquidity providers; circuit breakers, price limits, and trading halts are volatility controls that suspend or constrain matching rather than change the underlying order flow.

Best-execution obligations require firms to take all sufficient steps to obtain the best possible result for clients, considering price, cost, speed, likelihood of execution and settlement, size, and nature of the order.

Insider dealing prohibitions attach to material non-public information obtained through an inside source; tippee liability extends to persons who knowingly receive such information and trade or pass it on.

Market manipulation includes wash trades (no change in beneficial ownership), spoofing (orders placed with intent to cancel before execution), layering, marking the close, and disseminating false or misleading information.

Short-selling regimes commonly require locate-and-borrow confirmation before sale, disclosure of significant net short positions above thresholds, and restrictions on naked short selling.

Clearing and settlement infrastructure typically involves a central counterparty (CCP) that novates trades, a central securities depository (CSD) that holds securities, and a payment system for cash legs; settlement cycles are converging on T+1 in major markets.

Ordinary (common) shares carry residual claims on earnings and assets, voting rights, and limited liability; preference shares rank ahead for dividends and liquidation but typically lack votes and carry fixed dividend rates.

Cumulative preference shares accrue unpaid dividends; participating preference shares share in surplus profits; convertible preference shares exchange into ordinary shares at a stated ratio.

Shareholder returns decompose into dividend yield (annual dividend / price) plus capital gain (price change / initial price); total return = (P1 − P0 + D) / P0.

Stock splits and bonus issues change share count and price proportionally without changing market capitalization or ownership percentages; rights issues offer existing holders the right to subscribe at a discount, and the theoretical ex-rights price = (market value before + subscription proceeds) / shares after.

Order types: market orders execute immediately at best available price; limit orders execute only at the limit or better; stop orders become market orders once a trigger price is touched; stop-limit orders become limit orders at the trigger.

Primary markets involve issuance (IPOs, follow-on offerings, placements); secondary markets provide liquidity and price discovery for already-issued shares.

Equity indices may be price-weighted (divisor-adjusted average of prices), market-capitalization-weighted (float-adjusted or full), or equal-weighted; each methodology produces different sector and size exposures.

Depositary receipts (ADRs, GDRs) are negotiable certificates issued by a depositary bank representing shares in a foreign company, allowing local-currency trading and settlement outside the home market.

Corporate actions requiring adjustment to derivative and index contracts include cash dividends above a threshold, rights issues, splits, mergers, and spin-offs; exchanges publish adjustment factors to preserve contract continuity.

Bond price and yield are inversely related; for a given change in yield, price increases exceed price decreases (positive convexity), and the effect is larger for longer maturities and lower coupons.

Macaulay duration = weighted average time to cash flows; modified duration = Macaulay duration / (1 + y/m); approximate percentage price change ≈ −modified duration × Δy + ½ × convexity × (Δy)².

DV01 (dollar value of a basis point) = modified duration × dirty price × 0.0001; it measures the money change in value for a one-basis-point yield move.

Yield measures differ: current yield = annual coupon / clean price; yield to maturity assumes reinvestment at the YTM; yield to call uses the call date and call price; yield to worst is the minimum across all call and maturity scenarios.

Accrued interest = coupon rate × days since last coupon / days in coupon period, on the appropriate day-count basis (e.g., actual/actual, 30/360); dirty price = clean price + accrued interest.

The term structure can be upward sloping (normal), flat, or inverted; theories include pure expectations, liquidity preference (term premium rises with maturity), and segmented markets (supply and demand by maturity bucket).

Credit spread = yield on a corporate or sovereign bond minus the yield on a comparable-maturity government benchmark; spread widening signals deteriorating credit conditions or rising risk aversion.

Interest rate swaps exchange fixed and floating payments on a notional; the fixed rate (swap rate) equates the present values of both legs at inception; a payer swap gains when rates rise, a receiver swap gains when rates fall.

Money-market instruments (T-bills, commercial paper, certificates of deposit, repurchase agreements) are short-dated, discount or interest-bearing, and priced on simple or discount-yield conventions rather than compounded YTM.

A forward contract is a bespoke obligation to buy or sell an asset at a fixed price on a future date; its value at inception is zero, and the forward price F = S × (1 + r)^T − FV(carry benefits) for a cash-and-carry relationship.

Futures are standardized, exchange-traded, cleared through a CCP, margined daily, and marked to market; forwards carry counterparty credit risk and no interim cash flows.

Option payoffs at expiry: long call = max(S − K, 0); long put = max(K − S, 0); short positions are the negatives. Premium paid or received is separate from the payoff.

Put-call parity for European options on non-dividend-paying stock: C − P = S − K × e^(−rT); violations permit arbitrage until transaction costs close the gap.

The Black-Scholes-Merton model prices European options using S, K, r, T, volatility, and dividend yield; the Greeks are delta (∂V/∂S), gamma (∂delta/∂S), theta (∂V/∂t), vega (∂V/∂σ), and rho (∂V/∂r).

Implied volatility is the volatility input that reproduces the observed market price; the volatility smile or skew reflects demand for downside protection and fat-tailed return distributions.

Swaps can be decomposed into a series of forwards or a portfolio of bonds; credit default swaps transfer credit risk, with the protection buyer paying a periodic premium and receiving a contingent payment upon a credit event.

Structured products combine a bond or deposit with an embedded derivative: capital-protected notes typically hold a zero-coupon bond plus a call option; reverse convertibles embed a short put; autocalls embed digital and barrier features.

Counterparty and collateral mechanics matter: initial margin covers potential future exposure, variation margin settles mark-to-market moves, and central clearing reduces but does not eliminate systemic risk.

Open-ended funds issue and redeem units at net asset value (NAV) calculated as (total assets − total liabilities) / units outstanding; closed-ended funds trade on exchange at prices that may differ from NAV (premium or discount).

NAV per unit is normally struck at a defined valuation point using the last available market prices; stale pricing of illiquid or suspended holdings can misstate NAV and create dilution for continuing investors.

Fund structures include UCITS-style schemes (diversification, liquidity, and eligible-asset rules), hedge funds (limited redemption, leverage, performance fees), private equity funds (drawdown and lock-up), and money-market funds (short duration, high credit quality).

Fee structures: management fee as a percentage of average NAV; performance fee typically as a percentage of profits above a high-water mark; entry and exit charges; total expense ratio aggregates ongoing charges.

The high-water mark prevents repeated performance fees after losses: fees accrue only on gains above the highest prior NAV at which a performance fee was paid.

Investment fund governance requires independent oversight, custody segregation of client assets, valuation policies, and conflicts-of-interest management; side letters and preferential terms must be disclosed and monitored.

Pooled vehicles provide diversification and economies of scale but introduce agency costs, capacity constraints, style drift, and liquidity mismatch between redemption terms and underlying assets.

Subscription and redemption mechanics include dealing cut-off times, forward pricing (price struck after the order is received), swing pricing to allocate dealing costs, and gates or suspension powers in stressed markets.

Expected portfolio return = Σ wᵢ × E(Rᵢ); portfolio variance = Σ Σ wᵢ wⱼ σᵢⱼ, which reduces to w₁²σ₁² + w₂²σ₂² + 2w₁w₂ρσ₁σ₂ for two assets.

Diversification benefit arises when pairwise correlations are below +1; the lower the correlation, the greater the reduction in portfolio risk for a given expected return.

The efficient frontier is the set of portfolios offering the highest expected return for each level of risk; the optimal risky portfolio maximizes the Sharpe ratio (E(Rp) − Rf) / σp.

The capital allocation line combines the risk-free asset with the optimal risky portfolio; an investor's risk aversion determines the split between the two.

Strategic asset allocation sets long-term policy weights from objectives, risk tolerance, and time horizon; tactical asset allocation makes shorter-term deviations based on valuation and macro views within policy limits.

Rebalancing to policy weights enforces a contrarian discipline; calendar rebalancing occurs at fixed intervals, threshold rebalancing when weights drift beyond a band, and range rebalancing combines both.

Performance attribution decomposes excess return into allocation effect (sector or asset-class weights versus benchmark) and selection effect (security picks within each segment), plus interaction.

Risk-adjusted measures: Sharpe ratio uses total volatility; Treynor ratio uses beta; Jensen's alpha = Rp − [Rf + β(Rm − Rf)]; information ratio = active return / tracking error.

Liability-driven investing matches asset cash flows and duration to liability schedules; surplus volatility and funding-ratio hedging are central for pension and insurance portfolios.

Intrinsic value estimates use discounted cash flow (DCF): value = Σ CFt / (1 + r)^t plus terminal value; the discount rate reflects the opportunity cost of capital and risk.

Dividend discount models: Gordon growth V₀ = D₁ / (r − g) requires r > g; the two-stage and H-models relax the constant-growth assumption for high-growth firms.

Free cash flow to the firm (FCFF) = EBIT × (1 − tax) + depreciation − capital expenditure − increase in working capital; FCFF is discounted at WACC.

Free cash flow to equity (FCFE) = FCFF − interest × (1 − tax) + net borrowing; FCFE is discounted at the cost of equity. Equity value = enterprise value − net debt.

WACC = (E/V) × Re + (D/V) × Rd × (1 − tax), where Re is the cost of equity and Rd the pre-tax cost of debt; weights should be market-value based.

Relative valuation uses price multiples (P/E, P/B, P/S, EV/EBITDA) compared with peers, history, or the market; a justified P/E = payout ratio / (r − g).

The cost of equity can be estimated with the capital asset pricing model: Re = Rf + β × (Rm − Rf); beta measures sensitivity of the stock's returns to market returns.

Residual income valuation: V₀ = B₀ + Σ (ROE − r) × B(t−1) / (1 + r)^t; it is useful when free cash flows are negative or hard to forecast.

Financial statement analysis: DuPont decomposition ROE = net margin × asset turnover × financial leverage; quality of earnings checks accruals, revenue recognition, and one-off items.

Market risk measures: value at risk (VaR) estimates the loss not exceeded with a given confidence over a horizon; expected shortfall (CVaR) averages losses beyond the VaR threshold and is sub-additive.

VaR methods include historical simulation (empirical return distribution), variance-covariance (normal approximation), and Monte Carlo simulation; each embeds different distributional assumptions.

Stress testing and scenario analysis complement VaR by examining losses under extreme but plausible events; reverse stress testing identifies scenarios that breach solvency or limits.

Credit risk metrics: probability of default (PD), loss given default (LGD), exposure at default (EAD); expected loss = PD × LGD × EAD.

Liquidity risk includes funding liquidity (ability to meet obligations) and market liquidity (ability to trade without moving prices); liquidity coverage and net stable funding ratios are standard banking metrics.

Operational risk arises from failed processes, people, systems, or external events; controls include segregation of duties, reconciliation, access management, and business continuity planning.

Compliance programs rest on policies and procedures, training, monitoring and surveillance, testing, and remediation; a compliance culture requires tone from the top and escalation channels.

Know-your-client (KYC) and anti-money-laundering (AML) controls include customer due diligence, beneficial ownership identification, sanctions screening, transaction monitoring, and suspicious-activity reporting.

Risk governance separates the three lines of defense: business units own risk, risk and compliance functions oversee it, and internal audit provides independent assurance.

Fiduciary duty comprises duties of loyalty (act in the client's best interest, avoid or disclose conflicts) and care (competence, diligence, and prudence in advice and management).

Suitability requires matching recommendations to the client's objectives, risk tolerance, time horizon, liquidity needs, and financial circumstances; know-your-client information must be updated.

Conflicts of interest must be identified, avoided where possible, or managed and disclosed; undisclosed inducements, soft-dollar arrangements, and principal trading against clients are prohibited.

Client confidentiality protects non-public client information; disclosure is permitted when required by law, regulation, or court order, or with client consent.

Fair dealing requires treating all clients equitably, prohibiting front-running of client orders, allocating trades fairly, and correcting errors promptly and consistently.

Independence and objectivity require separating research from investment banking and sales pressures; research recommendations must have a reasonable and adequate basis.

Marketing communications must be fair, clear, and not misleading; past performance must be presented with appropriate caveats and must not imply future results.

Complaints handling and redress should be documented, time-bound, and escalated; client assets must be segregated and reconciled to protect against misappropriation.