Just about to start derivatives for the first time...

CFA Level II
#1

Been seriously busy with work and haven’t tackled derivatives yet.

reslly just wanna rush through this as I’ve left it till the end cause it’s a nasty topic and I’ve still got ethics to cover. But what are the key questions that usually come up and what should I focus on?

If the questions are a bit all over the place like with equity/accounting I’m tempted to leave it and just open up the paper on exam day and circle A 6 times in a row (up to a maximum of 18 if the examiners are feeling particularly cruel)

#2

Maybe I should just do the EOC and mock questions to see if i can memorise a few methodologies…?

#3

Key points:

Calculation of forward, swap and FRA

Delta hedging

Equivalence of swaps and other instruments

It’s possible to learn them for few days but at the price of other topics’ revision.

#4

I would agree with Gebura - cover those topics and you will be fine.

#5

I find options easiest to grasp, and on Mocks I have the feeling that it’s represented more than the other topics. So probably worth trying to really understand options.

On Forwards and Futures, learn the basic method of getting to the forward price (i.e. compounding the spot price and deducting the FV of dividends/interest) and the key differences between Forwards and Futures (i.e. futures exchange-traded, marked to market etc.).

On Swaps, learn the basic terms (receiver, payer etc.) and the basic formula to calculate the swap rate, i.e. (1-Z1)/(Z1+Z2+Z3+Z4).

With that and some common sense I think you could get to 50%+ in Derivatives sections with just a few hours invested now.

#6

Derivatives is a 5-15 weighting. So if they want to screw us all, they can ask 3 item sets. On the positive side, the concepts will be fresh in your mind for the exam. To alleviate your concern, it isnt all over the place like equity/accounting. The topics are relatively self contained. Dont try to finish it all in one day. Fit it in before your revision schedule for the day. Finish forwards/futures in 2-3 hours. Next day, do options. The following day, do swaps and read through CDS. Gives you a better shot at remembering.

#7

Be careful: you got the basic formula wrong. It’s:

(1 − Z4 )/(Z1 + Z2 + Z3 + Z4)

#8

Yes, thank you very much! Time to revise Swaps again blush

#9

I wrote a series of articles on pricing and valuing derivatives that may be helpful:

#10

I personally thought I was ok on Derivs just going through a 3rd party provider and their EOCs, then I tried to do the CFAI EOCs and was completely lost. I would recommend taking a look through those after you’ve done a review to make sure you understand how to calc and value all derivs. I’m good on them now after that wake up call lol.

#11

Yeah! dont forget to check 2015 mock, swap btw IIG and IIG Pol is so confusing have done it twice still dont get the concept

#12

I had never covered derivatives, I went through those postings on the website in a few hours, spent about 2 hours on EOCs, and got an average of 40% on 5 online tests.

Being content with a score just above random guessing looks quite uninspriting, BUT considering getting 4/6 in all other topics and 2/6 in derivatives will get me a pass, I think my strategy is sound lol

I recommend you spending some time at his website, it was def. worth my time.

BTW, thanks Bill, it has some great contents.

#13

My pleasure.

I appreciate your kind words.