CFA Level 2 - Exam Smart Tips To Help You Pass CFA Level 2

This training is extremely different from the other programs and has been battle tested by thousands of CFA Candidates.

No matter where you stand in your preparation this program is powerful and will give you the confidence and the elements you are missing.

The program has been designed to make complicated concepts easy. It is especially intended for those who have difficulties going through the material alone.

Whatever the material you like and picked for your preparation, this program will help you take the most out of your investment and time spent actually studying.

Investing in this training is like getting a personal one-on-one helicopter ride to the top of the mountain. You don't have to climb it yourself.

In this lesson, we explain the worksheets and workbook that you get with this course. You will also be able to download the workbook from the resources section of this lesson.

This lecture marks the start of the CFA level 2 exam preparation. Jhan shares a crucial piece of advice in which he emphasises on starting with a recap of the following four courses from your CFA Level 1 Curriculum:

1. Financial Reporting and Analysis (Financial Statement Analysis)

2. Quantitative Methods

3. Equity Investments

4. Fixed Income Investments

Jhan in this lecture highlights the key differences in CFA Level 1 and 2 Exams. 

CFA Level 2 Exam is the hardest CFA Exam but not because it is technically more difficult. It is the most difficult one because of two reasons:

1. You are competing against a higher calibre peer group who have already passed the level 1 exam.

2. CFA level 2 exam format is based on Case-Studies. A more in-depth study is required to pass it.

An important and invaluable lecture for the CFA level 2 exam preparation. Jhan shares a comprehensive plan for passing CFA Level 2 Exam that includes smart tips, guidelines and strategies.

In this lesson, we explain the worksheets and workbook that you get with this course. You will also be able to download the workbook from the resources section of this lesson.

Jhan starts the CFA Level 2 Smart Tips for Economics Course with one of the most notorious and hard-to-comprehend topics: 'Triangular Currency Arbitrage'. The first step is to be able to understand and calculate currency cross rates. Watch this lecture to master this concept with a detailed example.

The next step is understanding the mathematics of calculating currency cross rates with bid-ask spread. The key is to realise that whenever we take the reciprocal of a bid quote, the outcome is an ask quote with reversed parity.

The final step is to use the LADDER Method to calculate the arbitrage profit and to determine the direction of the three currencies' conversions. LADDER Method is 'Multiple Up the Bid Quotes' and 'Divide Down the Ask Quotes'

Now we turn our attention toward Pricing and Valuing a Currency Forward Contract. Watch this video to learn how to price a currency forward contract using Cover Interest Rate Parity (CIRP).

This video lecture discusses the five important Currency Relationships Paritys':

1. Covered Interest Rate Parity (CIRP)

2. Uncovered Interest Rate Parity (URP)

3. Purchasing Power Parity (PPP)

4. International Fisher Relation (IFR)

5. Unbiased Predictor of the Expected Future Spot Rate

We have learned to price a currency forward contract and now let's discuss the valuation of a currency forward contract. The first step is to break down the problem using a timeline. For the currency forward contract, we need to calculate the time lapsed since the initiation and the time remaining till the maturity.

After breaking down the problem, we mark to market the currency forward contract. Mark-to-market means calculating the gain or loss to the long/short positions. Then we discount the gain/loss to time zero.

Throughout this course we will celebrate your progress at 25%, 50%, 75% and 100%. I really want you to succeed but you need to take action and keep going so look forward to these milestones of progress. I will see you there and cheer you on as you keep going from one milestone to the next >>

Preview the workbook you get with this course, we've created 1 page take aways for each lesson and combined them all into this workbook for your convenience.

Pension Accounting is the centre-piece of the CFA Level 2 Topic Area: Financial Statement Analysis (FSA). We start here by first discussing the two different types of pension plans offered by companies:

1. Defined Benefit (DB) Plan (This is more important and discussed in detail)

2. Defined Contribution (DC) Plan (Not important for the exam and discussed superficially)

On the Balance Sheet, Pension Liability is reported as Projected Benefit Obligation (PBO) in U.S GAAP and Present Value of Defined Benefit Obligation (PVDBO) in IFRS. PBO or PVDBO is composed of the following components/factors:

1. Service Cost

2. Interest Cost

3. Actuarial Gains or Losses

4. Past Service Costs

5. Benefits Paid

On the Balance Sheet, Pension Assets are reported as Fair Value of Plan Assets (FVPA). FVPA is composed of the following components/factors:

1. Actual Return on Plan Assets

2. Employee and Employer Contributions

3. Expenses of managing the plan assets

4. Benefits Paid

The differences in U.S. GAAP and IFRS treatment of the components of the periodic pension cost is a highly likely testable topic for the CFA Level 2 Exam. This lecture is the first part of the total three parts of video lectures that discuss this topic in detail. The following components of the periodic pension costs are covered in this lecture:

1. Current Service Cost

2. Interest Cost

3. Expected Return on Plan Assets

This lecture is the second part of the total three parts of video lectures that discuss the topic "Differences in U.S. GAAP and IFRS treatment of the components of the periodic pension cost".  The following components of the periodic pension costs are covered in this lecture:

1. Actuarial Gains & Losses

This lecture is the third and the last part of the total three parts of video lectures that discuss the topic "Differences in U.S. GAAP and IFRS treatment of the components of the periodic pension cost".  The following components of the periodic pension costs are covered in this lecture:

1. Past (Prior) Service Costs

Total Period Pension Cost (TPPC) is an important metric for a Defined Benefit Pension Plan. It tells you about the contributions made by the employer in any given period and the change in the funded status of the plan. Watch and learn the formula for calculating TPPC. Please note that the treatment of TPPC under IFRS and U.S. GAAP are similar.

The reading Multinational Operations is the centrepiece of CFA level 2 topic area Financial Statement Analysis (FSA). It is one of the most testable topics for the exam. Multinational Operations is covered in six video lectures over here. This video lecture is an introductory lecture to Multinational Operations. Jhan will discuss the two types of foreign currency exposures faced by a company i.e. Transaction vs Translation Exposure.

Now, we will focus on Translation Methods. Two methods exist to convert the results of a foreign

subsidiary into the parent’s consolidated financial statements:

1. All Current-Rate Method

2. Temporal Method

The lecture also discusses the three types of currencies involved in the translation methods:

1. Local Currency

2. Functional Currency

3. Presentation/Reporting Currency

This lecture introduces you to the 'All Current Method' of translation. You will also learn about the following:

1. Current Exchange Rate

2. Average Exchange Rate

3. Historic Exchange Rate

Guidelines for applying the All Current Method are also discussed.

The All Current Method is as easy as AiBC. This term is actually a mnemonic and it can be used to apply the All Current Method in a very simple manner. In this term AiBC:

• A is used for the Average Rate

• i is used for the income statement

• B is used for the Balance Sheet

• C is used for the Current rate.

The process of translating the financial statements of a foreign subsidiary using the All Current Method starts with the income statement.

1. All the items in the income statement are translated using the average rate.

2. Then we call the second step Bridge in which the closing retained earnings are calculated given the opening retained earnings, Net Income from the Income Statement and Dividends translated at the historic rate.

3. Finally, the third step is to convert the Balance Sheet using the current exchange rate for almost every account except the equity.

All of this is beautifully explained using a coloured flowchart. Open the worksheet to access it.

The currency exposure of a firm is another critical concept to learn for the CFA Level 2 FSA Section. Firms using the All Current Method for translation expose their Net Assets. If the Net Assets are positive (in most cases), then the depreciation of the local currency will generate an FX loss. This loss is reported in the Cumulative Translation Adjustment (CTA). 

The concept of currency exposure is explained with an example in this lecture.

Before we dive into the world of the Temporal Method, let's first recap the All Current Method. Remember that the Temporal Method is a special case of the All Current Method. A good solid understanding of the latter will help and make it easier to comprehend the former.

This is an introductory lecture to the Temporal Method. The Temporal Method is used when the functional currency and the reporting currency are the same. It is used to remeasure the financial statements of the foreign subsidiary by converting the local currency into functional currency. The same AiBC rule can be followed but it has to apply in the reverse order. We will start from the Balance Sheet, then the Bridge, and finally the Income Statement.

As already mentioned, the Temporal Method is a special case of the All Current Method. Most of the accounts on the income statement and the balance sheet are translated using the average and the current exchange rates, respectively, but with a few exceptions. These exceptions are for non-monetary assets and liabilities. Watch this lecture to learn the difference between monetary and non-monetary assets/liabilities.

This lecture sums it all up. Like in the case of the All Current Method, a beautiful coloured flow chart is drawn in this lecture which explains the whole process of the Temporal Method.

1. It starts from the Balance Sheet, where all the monetary assets/liabilities are remeasured using the current exchange rate and all the non-monetary assets/liabilities are remeasured using the historic exchange rate.

2. Then the Bridge step, where the Net Income is a plug figure because we already are given the opening Retained Earnings, Dividends remeasured at Historic Rate, and the Closing Retained Earnings are known from step 1 (The Balance Sheet).

3. Finally, the third step is to remeasure the income statement using the mix of the average exchange rate and the historic exchange rate. All the items related to monetary assets/liabilities are remeasured using the average exchange rate and all the items related to non-monetary assets/liabilities are remeasured using the historic exchange rate.

The last step is to calculate the Remeasurement Gain or Loss.  Since we already know the Net Income from step 2 (Bridge), the remeasurement gain or loss is just a plug figure in the remeasured income statement. The difference between Net Income and Earning Before Tax is the Remeasurement gain or loss.

This lecture discusses the currency exposure of a firm using the Temporal Method to consolidate its financial statements. In the Temporal Method, the current exchange rate is used to remeasure only the monetary assets/liabilities. Therefore, the currency exposure is Net Monetary Assets/Liabilities. Understand this concept with an example in this lecture. The example discussed in this lecture also involves the calculation of Remeasurement Gain or Loss. Watch It !

Throughout this course we will celebrate your progress at 25%, 50%, 75% and 100%. I really want you to succeed but you need to take action and keep going so look forward to these milestones of progress. I will see you there and cheer you on as you keep going from one milestone to the next >>

In this lesson, we explain the worksheets and workbook that you get with this course. You will also be able to download the workbook from the resources section of this lesson.

This section is all about the Analysis of Variance (ANOVA) Table. ANOVA is a highly testable topic for the CFA Level 2 Quants section. ANOVA table shows the calculated values for acronyms like SSE, SST, RSS, MSE, MSR, and SEE.

Before we dive into the details and calculations of all these acronyms, let's first discuss least squares regression. This lecture gives you an introduction to regression analysis and the line of best fit.

This lecture discusses the concept of Sum of Squared Errors (SSE) from the ANOVA table. Watch this lecture to understand the concept and calculation of SSE.

The next two concepts from the ANOVA table are Regression Sum of Squares (RSS) and Total Sum of Squares (SST). Watch and learn these fundamental concepts to understand regression analysis.

The concept and calculation of degrees of freedom (df) for SSE, RSS, and SST are discussed in this lecture. Students are advised to open the worksheet attached to this lecture. It contains two tables. The first table shows the formulas to calculate degrees of freedom for any number of variables (k) in regression analysis and the second table shows degrees of freedom for a linear regression model.

The next three acronyms from the ANOVA table are discussed and explained in this lecture:

1. Mean Squared Error (MSE)

2. Mean Regression Sum of Squares (MSR)

3. Standard Error of Estimate (SEE)

Lastly, the Coefficient of Determination (R square) (another crucial concept from the ANOVA table) is discussed. The concept of Multiple Regression is also discussed.