Page 35 - FINAL CFA II SLIDES JUNE 2019 DAY 4

LOS 13.i: Evaluate how a specific regulation affects READING 11: CURRENCY EXCHANGE RATES: UNDERSTANDING EQUILIBRIUM VALUE
an industry, company, or security.

MODULE 13.1: ECONOMICS OF REGULATION

Regulations may shrink the size of one industry (e.g., if it is heavily taxed) while increasing the size of another (e.g., an
industry receiving subsidies).

Analysts should review the impact of current and proposed regulations on an industry or company, as regulation can have a
large impact on valuation.

Regulations are not necessarily always costly for those that end up being regulated. If the regulator is captive, regulations may
end up benefiting the regulated entities.

Regulations may introduce inefficiencies in the market. For example, past government bailout of financial institutions has
conveyed a message of future implicit guarantees. For this reason, the credit spreads on bonds issued by the financial sector may
not fully reflect their risk.

Some regulations may be specifically applicable to certain sectors while others may have broad implications affecting a number of
sectors. Certain industries have more exposure to certain types of regulations. For example, environmental laws have higher
implications for mining, oil, and gas sectors. Similarly, labor laws are more relevant for labor intensive industries.