ICAP PRC-3 Business and Economic Insights cheat sheet

Price elasticity of demand = % change in quantity demanded / % change in price; |E| > 1 elastic, |E| < 1 inelastic, |E| = 1 unit elastic.

Income elasticity: normal goods positive, inferior goods negative; cross-price elasticity positive for substitutes, negative for complements.

GDP (expenditure approach) = C + I + G + (X − M); nominal GDP uses current prices, real GDP uses base-year prices.

Business cycle phases: expansion, peak, contraction (recession), trough; two consecutive quarters of falling real GDP is a common recession definition.

Inflation measured by CPI (consumer basket) or GDP deflator = (nominal GDP / real GDP) × 100; real interest rate ≈ nominal rate − inflation (Fisher effect).

Demand-pull inflation arises from excess aggregate demand; cost-push inflation from rising input costs (e.g., wages, energy).

Unemployment types: frictional (job search), structural (skills mismatch), cyclical (demand deficiency); natural rate = frictional + structural.

Comparative advantage: a country gains from trade by producing goods with the lowest opportunity cost, even without absolute advantage.

Monetary policy tools: open market operations, reserve requirements, discount/policy rate; expansionary policy lowers rates and increases money supply.

Money market instruments (≤1 year): T-bills, commercial paper, certificates of deposit, repurchase agreements; capital market instruments (>1 year): bonds, equities.

Bond price and yield move inversely; price = Σ coupon/(1+r)^t + face/(1+r)^n; yield to maturity equates price to discounted cash flows.

Duration measures price sensitivity to yield: %Δprice ≈ −duration × Δyield; modified duration = Macaulay duration / (1 + y/m).

Equity valuation: dividend discount model P0 = D1 / (r − g); Gordon growth requires r > g.

CAPM: required return = risk-free rate + beta × (market return − risk-free rate); beta measures systematic risk.

Primary market = new issues (IPO, bond issuance); secondary market = trading of existing securities (exchange or OTC).

Derivatives: forwards/futures (obligation), options (right), swaps (exchange cash flows); call option gives right to buy, put gives right to sell.

Efficient market hypothesis forms: weak (prices reflect past prices), semi-strong (public info), strong (all info including private).

Systemic risk refers to the risk that failure of one institution or market segment spreads across the financial system.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves the balance.

Double-entry rule: debits increase assets and expenses, decrease liabilities and equity; credits do the opposite.

Accrual basis: recognize revenue when earned and expenses when incurred, regardless of cash timing; matching principle aligns expenses to revenues.

Depreciation methods: straight-line = (cost − residual)/useful life; reducing balance applies a fixed rate to carrying amount.

Inventory costing: FIFO, weighted average, specific identification; LIFO not permitted under IFRS.

IFRS vs local GAAP: IFRS is principles-based and used in many jurisdictions; US GAAP is more rules-based.

Statement of cash flows sections: operating, investing, financing; indirect method starts with profit and adjusts for non-cash items and working capital.

Key ratios: current ratio = current assets/current liabilities; quick ratio excludes inventory; debt-to-equity = total liabilities/equity; gross margin = gross profit/revenue.

Time value of money: FV = PV(1 + r)^n; PV = FV/(1 + r)^n; annuity PV = PMT × [1 − (1 + r)^−n]/r.

NPV = Σ cash flow_t/(1 + r)^t − initial investment; accept if NPV > 0; IRR is the discount rate making NPV = 0.

WACC = (E/V) × Re + (D/V) × Rd × (1 − tax rate); use market values where available.

Cost of equity via CAPM or dividend growth model: Re = D1/P0 + g.

Modigliani-Miller: without taxes, capital structure does not affect firm value; with taxes, debt creates a tax shield but increases financial distress costs.

Trade-off theory: optimal capital structure balances tax shield benefits against bankruptcy and agency costs.

Pecking order theory: firms prefer internal funds, then debt, then new equity.

Leverage: degree of operating leverage = contribution margin / EBIT; degree of financial leverage = EBIT / (EBIT − interest).

Working capital management: cash conversion cycle = days inventory + days receivable − days payable.

Cost classification: fixed vs variable, direct vs indirect, product vs period costs.

Contribution margin = sales − variable costs; contribution margin ratio = contribution / sales.

Break-even units = fixed costs / contribution per unit; break-even revenue = fixed costs / contribution margin ratio.

Target profit volume = (fixed costs + target profit) / contribution per unit.

Absorption costing includes fixed production overhead in product cost; variable costing treats fixed overhead as a period cost.

Overhead allocation: predetermined rate = estimated overhead / estimated activity base; applied overhead = rate × actual activity.

Activity-based costing assigns overhead to activities and then to products based on cost drivers.

Standard costing variances: material price = (standard price − actual price) × actual quantity; material usage = (standard quantity − actual quantity) × standard price.

Relevant costs for decisions are future, incremental cash flows; sunk costs and allocated fixed costs are irrelevant.

Porter's five forces: rivalry, threat of new entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers.

PESTLE analysis covers political, economic, social, technological, legal, environmental factors.

SWOT: strengths and weaknesses internal; opportunities and threats external.

Ansoff matrix: market penetration, market development, product development, diversification.

Porter's generic strategies: cost leadership, differentiation, focus (cost or differentiation).

Agency problem: separation of ownership and control creates conflicts; mitigated by board oversight, incentives, and disclosure.

Corporate governance codes typically address board independence, audit committee, risk management, and shareholder rights; comply-or-explain is common.

Stakeholder vs shareholder primacy: shareholder model maximizes shareholder value; stakeholder model considers employees, customers, community, environment.

Data analytics types: descriptive (what happened), diagnostic (why), predictive (what will happen), prescriptive (what should be done).

Big data characteristics: volume, velocity, variety, veracity, value.

Data quality dimensions: accuracy, completeness, consistency, timeliness, validity, uniqueness.

Database basics: primary key uniquely identifies a row; foreign key references another table's primary key; normalization reduces redundancy.

Control objectives for IT: confidentiality, integrity, availability; CIA triad.

IT general controls: access management, change management, backup and recovery, physical security.

Cybersecurity threats: phishing, malware, ransomware, insider threat; controls include firewalls, encryption, multi-factor authentication.

Cloud service models: IaaS (infrastructure), PaaS (platform), SaaS (software); deployment models: public, private, hybrid.

Data visualization best practice: choose chart type by data relationship (bar for comparison, line for trend, scatter for correlation).

Contract elements: offer, acceptance, consideration, intention to create legal relations, capacity, legality.

Breach remedies: damages, specific performance, injunction, rescission; damages aim to put claimant in position as if contract performed.

Company law: separate legal personality (Salomon principle), limited liability, directors' duties (care, skill, good faith, avoid conflicts).

Agency: principal grants authority to agent; agent binds principal if actual or apparent authority exists.

Employment law basics: contract of employment, unfair dismissal, discrimination, health and safety obligations.

Regulatory bodies in financial services: securities commission, central bank, prudential regulator; objectives include investor protection and market integrity.

Anti-money laundering: customer due diligence, suspicious activity reporting, record keeping.

Competition law prohibits anti-competitive agreements (cartels) and abuse of dominant position; mergers may require approval.

Fundamental ethical principles: integrity, objectivity, professional competence and due care, confidentiality, professional behaviour.

Integrity means being straightforward and honest in all professional and business relationships.

Objectivity requires not allowing bias, conflict of interest, or undue influence of others to override professional judgments.

Confidentiality: do not disclose information acquired through professional relationships without authority, unless legal or professional right/duty to disclose.

Threats to compliance: self-interest, self-review, advocacy, familiarity, intimidation; apply safeguards when threats are not at an acceptable level.

Ethical decision framework: identify facts, stakeholders, ethical issues, available options, consequences, and make a reasoned decision.

Whistleblowing is disclosure of wrongdoing; many jurisdictions protect whistleblowers from retaliation.

Independence in audit has two components: independence of mind (state of mind) and independence in appearance (avoiding facts that a reasonable observer would perceive as compromising).