# advice on derivatives

For those who didn’t know IR swaps before this level2, and now feel comfortable with it, what did you feel was the best way to learn? Meaning, reading and doing the problems out of Schweser, or the actual CFAI text, or both, or something else? How long did it take you? Thanks

Think of them as bonds. There is a great thread about this posted a couple of weeks ago. Use the search function and bump it for those who haven’t seen it.

Practice problems and watching Stalla videos. I must say Dave Hetherington is really good at breaking down derivatives into bite sized pieces.

i do it this way, which is similar to what was posted in a previous thread (1) Start with the FIXED payer - this is easy, just like a bond. Figure out what the cash flows will be. SO assume we just initiated a \$1 million semiannual pay 5% (i.e. this is the fixed rate) swap. At the time of the swap, 180 day LIBOR (annualized) is 4.5%. The cash flows for the FIXED payer will be: in 180 days - 25,000 in 360 days - 25,000 in 360 days - 1,000,000 (i know notional isnt actually swapped, but its easier to do it this way) Just discount those cash flows above to get the PV of the fixed rate payments. Now on to floating. Its actually easier and less work, because a floating rate bond will reset to par value at each payment date. Therefore all we have to do is. in 180 days - 22,500 in 180 days - 1,000,000. Just discount those cash flows now to get the PV of the floating rate payments. The PV of floating payments minus the PV of the fixed payments is the value to the fixed payer (i.e., the value of what i’m receiving minus the value of what i’m paying). If you have an actual example, we can go in more detail. But this is the way i do it, and it seems to work.

Thanks, I was more asking…HOW did you learn this, or what was the best way for you guys to learn that you found…i.e. going through the CFAI problems, strictly out of Schweser…?

cfalover Wrote: ------------------------------------------------------- > Thanks, I was more asking…HOW did you learn > this, or what was the best way for you guys to > learn that you found…i.e. going through the CFAI > problems, strictly out of Schweser…? CFAI problems. Just do all of them and spend a significant amount of time until everything “clicks.” Derivatives can be your highest scoring section if you spend the right time on it. Compare D’s to studying for Calculus or something. You have to know all the processes. Once you do, it becomes fairly easy.

Ok thanks bro.

bpdulog Wrote: ------------------------------------------------------- > Practice problems and watching Stalla videos. I > must say Dave Hetherington is really good at > breaking down derivatives into bite sized pieces. +1. Dave is it.