Financial DT Test cheat sheet

Equity = residual ownership claim; bond = senior contractual claim with fixed coupons and principal; preferred stock ranks between debt and common equity.

Bond price and yield move inversely: approximate price change ≈ −modified duration × Δyield × price, plus convexity adjustment ½ × convexity × (Δyield)².

Money market instruments (T-bills, commercial paper, CDs, repos) mature in ≤1 year and are quoted on a discount or add-on yield basis, not coupon basis.

Derivatives: forwards/futures lock a price (futures are standardized, cleared, margined); options confer a right (call = buy, put = sell); swaps exchange cash flows (e.g., fixed-for-floating interest rate swap).

Option payoff at expiry: long call = max(S−K, 0); long put = max(K−S, 0); premium paid/received shifts breakeven to K ± premium.

Put-call parity for European options on non-dividend stock: C − P = S − K·e^(−rT); violations imply arbitrage.

ETF vs mutual fund: ETF trades intraday on exchange with creation/redemption in-kind; open-end mutual fund transacts at end-of-day NAV.

Repo = sale of securities with agreement to repurchase; economically a secured loan, with haircut protecting the cash lender against collateral price moves.

Order types: market order = immediate execution at best available price; limit order = execution only at limit or better; stop order = becomes market order when trigger price is reached.

Bid-ask spread is the immediate round-trip cost; quoted spread = ask − bid; effective spread = 2 × |trade price − midpoint|.

Market microstructure: continuous auction (order-driven), quote-driven (dealer), and call auction (batch matching at a single clearing price).

Price discovery and liquidity are measured by quoted depth, tightness (spread), immediacy, and resiliency after large trades.

Circuit breakers and limit-up/limit-down bands halt or constrain trading to contain volatility; they change execution risk for resting orders.

Dark pools and ATSs execute off-exchange; MiFID II-style regimes require best execution and pre/post-trade transparency.

Short selling involves borrowing securities to sell, with recall and buy-in risk; locate requirements and uptick rules vary by jurisdiction.

T+1 vs T+2 settlement cycles affect funding and FX hedging needs; the trade date and settlement date are distinct.

Time series: returns r_t = ln(P_t/P_{t−1}) for log returns; annualize volatility by multiplying daily σ by √252 (trading days).

Sharpe ratio = (R_p − R_f)/σ_p; Sortino uses downside deviation; both are scale-free but assume stable risk.

Value at Risk (VaR) at 99%/1-day estimates the loss exceeded on 1% of days; Expected Shortfall (CVaR) averages losses beyond VaR and is subadditive.

Correlation ρ = Cov(X,Y)/(σ_X σ_Y); diversification benefit depends on ρ < 1, and correlation regimes shift in stress.

Garbage-in-garbage-out: data lineage, point-in-time (as-of) storage, and survivorship-bias-free universes are prerequisites for backtests.

Look-ahead bias occurs when a model uses information not available at decision time; restate historical fundamentals to point-in-time values.

Overfitting: in-sample performance overstates out-of-sample results; use walk-forward validation and penalize model complexity.

Reference data (identifiers, calendars, corporate actions) must be reconciled; ISIN/CUSIP/FIGI map instruments across systems.

Cloud shared-responsibility model: provider secures infrastructure; customer secures data, identity, configuration, and access controls.

APIs enable order routing and data access; OAuth 2.0/OpenID Connect for delegated authorization, mTLS for service-to-service authentication.

Resilience: RTO = maximum tolerable downtime; RPO = maximum tolerable data loss; design active-active or active-passive per criticality.

Latency vs throughput: co-location and kernel-bypass reduce latency; batching and parallel processing raise throughput.

Blockchain/DLT: distributed ledger with consensus; tokenization of assets requires legal enforceability of on-ledger ownership.

Encryption: at rest (AES-256) and in transit (TLS 1.2+); key management via HSM or KMS; hashing (SHA-256) for integrity, not confidentiality.

Observability = logs + metrics + traces; alerting thresholds should tie to business SLAs, not only infrastructure health.

Change management: segregation of duties between development and production deployment; immutable infrastructure and automated rollback.

Basel III capital: CET1, Tier 1, and Total capital ratios; risk-weighted assets (RWA) scale exposures by credit, market, and operational risk.

Liquidity: LCR = HQLA / net cash outflows over 30 days ≥ 100%; NSFR = available stable funding / required stable funding ≥ 100%.

Market risk: FRTB replaces internal-model VaR with expected shortfall and adds liquidity horizons and P&L attribution tests.

MiFID II/MiFIR: best execution, transaction reporting, research unbundling, and product governance (target market).

AML/KYC: customer due diligence, beneficial ownership identification, sanctions screening, and suspicious activity reporting.

GDPR: lawful basis for processing, data minimization, breach notification within 72 hours, and data subject rights.

Operational risk includes cyber, conduct, and third-party risk; DORA-type rules impose ICT incident reporting and resilience testing.

Insider dealing and market abuse: prohibitions on trading on material non-public information and on manipulation (spoofing, layering).

Suitability: recommendations must match client objectives, risk tolerance, time horizon, liquidity needs, and knowledge/experience.

Fiduciary duty comprises loyalty (avoid conflicts) and care (prudence, best interest); disclose and manage conflicts, never merely conceal them.

Risk profiling uses capacity (financial ability) and willingness (psychological tolerance); the lower of the two governs the mandate.

Know-your-client data must be refreshed; material life changes (retirement, inheritance, job loss) trigger re-assessment.

CFA-style ethics: integrity of capital markets, duties to clients and employers, and professionalism; client interests precede employer and personal interests.

Performance reporting: GIPS requires fair representation, full disclosure, and consistent, composite-based presentation.

Vulnerable clients (age, cognitive decline, bereavement) require extra care, documented rationale, and possible escalation.

Fee transparency: distinguish advisory fee, product cost, and transaction cost; disclose total cost of ownership.

Trade lifecycle: execution → confirmation/affirmation → clearing → settlement → reconciliation → corporate actions and asset servicing.

Central counterparty (CCP) novation: CCP interposes between counterparties, collects initial and variation margin, and mutualizes default risk.

Settlement fails: buy-in, cash compensation, and penalties (e.g., CSDR cash penalties) apply when delivery is late.

Straight-through processing (STP) reduces manual touchpoints and operational risk; exceptions are queued for manual repair.

Reconciliation compares internal records to custodian/broker statements; breaks are classified by root cause and aged.

Corporate actions: dividends, splits, mergers, and rights issues require timely entitlement calculation and tax withholding.

Custody: segregation of client assets, sub-custodian networks, and asset-servicing fees; omnibus vs segregated accounts differ in insolvency protection.

FX settlement risk (Herstatt) is mitigated by CLS or payment-versus-payment arrangements.