CA Final AFM High Probability Theory Notes (New Syllabus 2025)
📘 CA Final AFM – High Probability Theory Notes
Chapter-wise exam-ready notes + ICAI-style questions + examiner traps 🚨 | Powered by Zeroinfy
⚠️ How to use these notes (Best Strategy)
- Revise Tier-1 chapters first (most theory asked).
- Write answers in bullets + headings (avoid long paragraphs).
- Underline keywords once (don’t overdo).
- End with a 1-line conclusion for better scoring.
🧭 Quick Navigation
1️⃣ Financial Policy & Strategy (Tier-2 ⭐⭐⭐)
Often asked as “interface” / “strategic finance decisions” / short theory definitions.
🔑 Core Concepts (Exam Language)
- Financial policy = broad framework for financing, investment, dividend, risk decisions aligned with corporate strategy.
- Strategic financial management focuses on long-term value creation & competitive advantage.
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Sustainable Growth Rate (SGR) = maximum growth without raising new equity.
Formula: ROE × (1 − Dividend payout ratio) / (or retention ratio approach). - Dividend policy impacts funding needs, cost of capital, market perception (signaling).
- Capital structure impacts risk & return: leverage increases EPS volatility and financial risk.
📝 ICAI Favourite Theory Questions
- Explain the interface of financial policy with strategic management.
- Define SGR and explain how it guides growth planning.
- Discuss how dividend policy affects financing decisions.
- Explain why capital structure decisions are strategic.
🚨 Examiner Traps
- Writing “SGR = sales growth” (wrong). It is growth without new equity.
- Interface answer without linking finance decisions to long-term value & strategy.
✅ Keywords to Underline
financial policy, strategic management, value maximization, SGR, retention ratio, payout ratio, capital structure, dividend policy, signaling
⚡ 30-Second Revision Box
Financial policy aligns investment + financing + dividend + risk with strategy. SGR tells max growth without new equity. Capital structure & dividend policy are strategic because they impact risk, flexibility and value.
2️⃣ Risk Management (Tier-1 ⭐⭐⭐⭐)
Most repeated theory chapter. Very likely as 4/5/8 marks or case-based theory.
🔑 Core Concepts (Exam Language)
- Risk = possibility of deviation from expected outcome.
- Types: Business risk, Financial risk, Market risk, Credit risk, Liquidity risk, Operational risk, Legal/Compliance risk.
- Risk appetite = risk the firm is willing to accept; Risk tolerance = acceptable variation/limits.
- Process: Identify → Measure → Evaluate → Treat (avoid/reduce/transfer/accept) → Monitor & review.
- Hedging reduces risk; speculation takes risk for profit; arbitrage exploits price mismatch.
- VaR = maximum expected loss at given confidence level over a time horizon.
📝 ICAI Favourite Theory Questions
- Differentiate: Risk appetite vs Risk tolerance.
- Explain hedging vs speculation vs arbitrage.
- Explain VaR (meaning + limitations).
- Risk response strategies: avoid, reduce, transfer, retain.
🚨 Examiner Traps
- Never define VaR without confidence level + time horizon.
- Writing appetite = tolerance (wrong).
✅ Keywords to Underline
risk appetite, risk tolerance, risk identification, risk assessment, mitigation, transfer, hedging, speculation, arbitrage, VaR, confidence level, time horizon
⚡ 30-Second Revision Box
Risk Mgmt = Identify → Measure → Treat → Monitor. Hedge to reduce uncertainty, speculate to profit, arbitrage to exploit mismatch. VaR = max expected loss at given confidence over time.
3️⃣ Startup Finance (Tier-1 ⭐⭐⭐⭐)
New syllabus focus & high-yield theory area. Scores well if written structured + practical.
🔑 Core Concepts (Exam Language)
- Startup finance = raising funds for early-stage ventures to build, scale and sustain growth.
- Stages: Idea/Pre-seed → Seed → Early growth (Series A/B) → Expansion → Exit.
- Modes of financing: bootstrapping, angels, VC/PE, crowdfunding, incubators/accelerators, venture debt, strategic investors.
- Angel vs VC: angels invest earlier, smaller tickets; VCs are institutional, larger tickets, growth-focused with governance rights.
- Dilution = reduction in founders’ ownership due to fresh equity issuance.
- Key investor lens: market size (TAM), product-market fit, unit economics, team, scalability, moat, runway.
📝 ICAI Favourite Theory Questions
- Explain various modes of financing for startups.
- Differentiate Angel vs VC (5–7 points).
- What are the contents of a pitch deck?
- Explain term sheet and key clauses (valuation, liquidation preference, anti-dilution, board rights).
🚨 Examiner Traps
- Writing only definitions — ICAI wants stage-wise + comparisons.
- Pitch deck answer without problem → solution → market → traction → financials → ask.
✅ Keywords to Underline
bootstrapping, angel investor, venture capital, dilution, term sheet, liquidation preference, anti-dilution, runway, traction, valuation
⚡ 30-Second Revision Box
Startup finance is stage-wise (seed → growth → exit). Key modes: bootstrapping, angels, VC, venture debt. Pitch deck = problem, solution, market, traction, model, team, financials, funding ask. Angel vs VC is a favourite “differentiate”.
4️⃣ Securitization (Tier-2 ⭐⭐⭐)
Theory is usually definition + process + parties + benefits/risks (very scoring).
🔑 Core Concepts (Exam Language)
- Securitization = converting illiquid assets (loans/receivables) into tradable securities.
- Key parties: Originator → SPV (Special Purpose Vehicle) → Investors; Servicer manages collections.
- Cash flow structure: collections from assets flow to investors as per priority (waterfall).
- PTCs (Pass Through Certificates) represent investor claims on cash flows.
- Credit enhancement improves rating/acceptance (over-collateralization, guarantees, reserve account).
- Benefits: liquidity, risk transfer, improved capital adequacy, diversified funding.
- Risks: credit risk of underlying assets, complexity, servicing risk, reputation risk.
📝 ICAI Favourite Theory Questions
- Explain the process of securitization and role of SPV.
- Who are the parties in securitization? Explain their roles.
- Benefits and risks of securitization to originator and investors.
- What is credit enhancement?
🚨 Examiner Traps
- Not mentioning SPV (major mark loss).
- Only writing “liquidity” — must add risk transfer + funding diversification.
✅ Keywords to Underline
securitization, SPV, originator, investors, servicer, PTC, waterfall, credit enhancement, over-collateralization, risk transfer
⚡ 30-Second Revision Box
Securitization converts loans/receivables into securities via SPV. Parties: originator, SPV, servicer, investors. Benefits: liquidity + risk transfer. Risks: underlying credit quality + complexity.
5️⃣ Derivatives – Forex & Interest Rate (Tier-1 ⭐⭐⭐⭐)
🔑 Core Concepts
- Forward = customized OTC; Futures = standardized exchange-traded.
- Options give right (not obligation). Call = buy; Put = sell. Premium paid upfront.
- Swaps = exchange of cash flows (currency / interest rate).
- OTC vs Exchange: counterparty risk + customization vs margining + daily settlement.
📝 ICAI Favourite Questions
- Forward vs Futures (6+ points).
- Options vs Forwards (right vs obligation, premium).
- Explain swaps (meaning, benefits, when used).
- OTC vs Exchange derivatives (merits/demerits).
🚨 Examiner Traps
- Futures called “customized” (wrong).
- Options without “right not obligation” + “premium”.
⚡ 30-Second Revision Box
Forward=OTC+custom; Futures=exchange+standard+margin+MTM. Options=right not obligation+premium. Swaps=exchange cash flows to manage currency/interest risk.
6️⃣ Portfolio Management (Tier-1 ⭐⭐⭐)
🔑 Core Concepts
- Systematic risk cannot be diversified; unsystematic can be diversified.
- Diversification benefit depends on correlation.
- CAPM interpretation: Expected return = Risk-free + Beta × market risk premium.
- Efficient frontier = best return for given risk / least risk for given return.
🚨 Examiner Traps
- Diversification reduces all risk (wrong — only unsystematic).
⚡ 30-Second Revision Box
Diversification reduces unsystematic risk. CAPM links return with beta (market sensitivity). Efficient frontier shows best risk-return combinations.
7️⃣ Security Analysis & Efficient Market Hypothesis (Tier-2 ⭐⭐⭐)
🔑 Core Concepts
- Fundamental analysis = intrinsic value via economy-industry-company.
- Technical analysis = price/volume trends, patterns.
- EMH: Weak (past prices), Semi-strong (public info), Strong (public + private info).
⚡ 30-Second Revision Box
Fundamental = intrinsic value; Technical = trend/pattern. EMH weak/semi-strong/strong define how quickly info is reflected in prices.
8️⃣ Mutual Funds & ETFs (Tier-2 ⭐⭐)
🔑 Core Concepts
- Open-ended = buy/sell at NAV; Close-ended = traded.
- ETF = exchange-traded index tracker; generally lower costs.
- NAV = (Market value of assets − liabilities) / units.
⚡ 30-Second Revision Box
Open-ended transact at NAV; close-ended traded. ETF trades like share and tracks index. NAV formula is must.
9️⃣ Mergers & Acquisitions + Restructuring (Tier-2 ⭐⭐⭐)
🔑 Core Concepts
- Motives: synergy, growth, diversification, market power, tax benefits, turnaround.
- Synergy: operational vs financial.
- Buyback: improves EPS, supports price, changes capital structure (signaling effect).
- LBO: debt-heavy acquisition; needs stable cash flows.
📝 ICAI Favourite Theory Questions
- Motives for M&A and types of synergy.
- Merger vs acquisition vs takeover.
- Buyback objectives and impact.
- Defense strategies against hostile takeovers (white knight, pacman, etc.).
⚡ 30-Second Revision Box
M&A motives revolve around synergy. Buyback impacts EPS + leverage. LBO = debt-heavy acquisition needing stable cash flows. Hostile defense strategies are commonly asked.
🔟 How to Write AFM Theory Answers (Scoring Template ✅)
🧩 5-Step Answer Format (Use in Exam)
- Definition (1–2 lines)
- Key points (5–7 bullets)
- Difference table (if asked “differentiate”)
- Example (1 small illustration)
- Conclusion (1 line)
🚫 What NOT to do
- Don’t write story answers. ICAI rewards structure.
- Don’t miss keywords (right-not-obligation, margining, systematic risk, SPV).
🏁 Final Tip
If stuck: Definition → 6 bullets → 1 example → 1-line conclusion. This alone can fetch 60–80% marks in theory answers.
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