Korea Certified International Finance Specialist cheat sheet

Covered interest parity: F/S = (1+i_quote)/(1+i_base); forward premium approximates the interest differential for short horizons.

Uncovered interest parity is an empirical failure in the short run because of the forward premium puzzle: high-yield currencies tend to appreciate rather than depreciate.

Purchasing power parity: absolute PPP equates price levels; relative PPP states that exchange-rate change approximates the inflation differential.

Balance of payments identity: current account + capital account + financial account + net errors and omissions = 0.

Mundell-Fleming trilemma: a country cannot simultaneously maintain a fixed exchange rate, free capital mobility, and independent monetary policy.

Eurobond vs. foreign bond: a Eurobond is issued outside the issuer's home country in a currency other than the issuer's domestic currency; a foreign bond is issued in a foreign market in that market's currency.

Bond yield relation: yield = coupon rate when price = par; price and yield move inversely, and duration measures the sensitivity of price to yield.

Credit spread = corporate yield minus benchmark sovereign yield; widening spreads signal rising risk aversion or deteriorating issuer fundamentals.

Quotation conventions: a direct quote gives domestic currency per unit of foreign currency; an indirect quote gives foreign currency per unit of domestic currency.

Cross rate derivation: if EUR/USD and USD/JPY are quoted, then EUR/JPY = EUR/USD × USD/JPY; verify the direction of the quote before multiplying.

Bid-ask spread: the dealer buys at the bid and sells at the ask; the spread compensates for inventory and counterparty risk.

Transaction exposure affects known foreign-currency cash flows; translation exposure affects consolidated accounting statements; economic exposure affects long-run competitiveness.

Hedging tools: forward contracts lock in a rate; FX futures are standardized and exchange-traded; FX options create a floor or cap at the cost of a premium; money-market hedge replicates a forward.

Forward hedge outcome = foreign-currency receivable × forward rate; compare with unhedged expected value to decide whether to hedge.

Value at risk for an FX position approximates position value × rate volatility × z-score for the chosen confidence level.

Korean won is quoted as KRW per USD in the onshore market; a rise in the number means won depreciation against the dollar.

Letter of credit: the issuing bank undertakes to pay the beneficiary against compliant documents; the bank's credit replaces the buyer's credit.

UCP 600 requires documents to comply strictly with the credit terms; banks examine documents on their face and do not verify goods.

Incoterms allocate cost, risk, and obligation: FOB transfers risk at the ship's rail; CIF adds cost and insurance to the destination port; DDP places maximum obligation on the seller.

Documentary collection: documents are released against payment (D/P) or against acceptance (D/A); the bank acts as an agent and does not guarantee payment.

Bill of exchange: a drawer orders a drawee to pay a sum; a time draft becomes a banker's acceptance when a bank accepts it, improving tradability.

Trade finance instruments: packing credit funds pre-shipment production; export bill purchase discounts receivables after shipment; forfaiting is non-recourse discounting of medium-term receivables.

Korean export support: Korea Trade Insurance Corporation (K-SURE) provides export credit insurance; the Export-Import Bank of Korea (KEXIM) provides export and import financing.

IPO process: selection of underwriters, due diligence, filing and review, bookbuilding, pricing, allocation, and listing.

Firm commitment underwriting places pricing risk on the underwriter; best efforts underwriting places it on the issuer.

ADR and GDR: a depositary receipt represents shares of a foreign company and trades in a foreign market; a sponsored program gives the issuer more control than an unsponsored one.

Rule 144A allows resale of restricted securities to qualified institutional buyers without public registration; Regulation S covers offshore offerings.

Syndicated loan roles: the arranger structures and underwrites the facility; participants take portions of the exposure.

Cross-border M&A: purchase price allocation, synergy valuation, regulatory approvals, and financing structure determine deal feasibility.

Cost of capital: WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate); cross-border projects add country risk premium and currency risk to the discount rate.

Portfolio expected return = sum of weight × expected return; portfolio variance includes covariance terms, not just individual variances.

Diversification benefit depends on correlation; with correlation below 1, portfolio risk is less than the weighted average of component risks.

CAPM: E(Ri) = Rf + βi × (E(Rm) − Rf); beta measures systematic risk, which cannot be diversified away.

Sharpe ratio = (portfolio return − risk-free rate) / standard deviation; it measures excess return per unit of total risk.

Efficient frontier: the set of portfolios offering the highest expected return for each level of risk; the tangency portfolio maximizes the Sharpe ratio.

Active return = portfolio return − benchmark return; tracking error is the standard deviation of active returns; information ratio = active return / tracking error.

Duration and convexity: ΔP/P ≈ −D × Δy + 0.5 × C × (Δy)²; convexity improves the estimate for large yield changes.

Forward payoff at maturity for a long position = spot price at maturity − forward price.

Interest rate parity links forward FX rates to interest differentials; a violation creates covered arbitrage opportunities.

Option payoff: call = max(S − K, 0); put = max(K − S, 0); the premium is paid up front, so the net profit subtracts it.

Put-call parity for European options: C − P = S − K × e^(−rT).

Interest rate swap: the fixed-rate payer pays fixed and receives floating; the swap can convert a floating-rate liability into a fixed-rate one.

Credit default swap: the protection buyer pays a premium and receives a payment if a credit event occurs; the CDS spread is a market measure of default risk.

Securitization: assets are pooled into a special purpose vehicle, tranched by seniority, and sold as securities; the SPV isolates the assets from the originator's bankruptcy.

Structured note payoff = principal protection plus an embedded derivative; the issuer's credit risk and the embedded option's cost reduce the effective yield.

Basel III capital: common equity tier 1 minimum is 4.5% of risk-weighted assets; the capital conservation buffer adds 2.5%; the leverage ratio minimum is 3%.

Liquidity standards: liquidity coverage ratio requires high-quality liquid assets to cover 30 days of net cash outflows; the net stable funding ratio covers one year.

FATF recommendations require customer due diligence, record keeping, and suspicious transaction reporting; the Wolfsberg principles address private banking and correspondent banking.

Market abuse: insider trading uses material non-public information; market manipulation distorts price formation; both are prohibited under securities law.

Conflicts of interest: Chinese walls and disclosure are used to manage conflicts; front-running client orders is prohibited.

Ethics frameworks: CFA Institute standards cover integrity, duties to clients, duties to employers, and duties to the profession; the standard is stricter than legal compliance.

Korean AML: the Act on Reporting and Using Specified Financial Transaction Information requires suspicious transaction reports and customer due diligence by financial institutions.

Bank of Korea sets the base rate; the Monetary Policy Board meets eight times a year to decide the policy rate.

The FX market operates as a market-average-rate system; the Korea Financial Telecommunications and Clearing Institute (KFTC) publishes the market average rate.

Foreign exchange regulations: the Foreign Exchange Transactions Act governs cross-border payments; resident and non-resident classifications determine reporting duties.

Foreign exchange position limits: domestic banks are subject to FX forward position limits relative to capital; the limits are set by the financial authorities.

Korea's capital market: KOSPI is the main board; KOSDAQ is the growth market; KRX operates both, and foreign investors trade through an investment registration system.

Bond market: Korea Treasury Bonds are the benchmark; foreign investors access them through the investment registration system and are subject to withholding tax on interest.

Macroprudential FX measures: the authorities use forward position limits and a macroprudential stability levy to curb excessive short-term external debt.

Korean won internationalization is gradual; the authorities have expanded the offshore won market and lengthened trading hours to improve accessibility.