I failed Level II in June 2010, and no binomial trees, and I know people who failed in June 2009, and no binomial trees. Have these ever been tested, just finishing SS 14 and curious how much effort to put in this
trees seem to be more of a level 1 topic.
In the L2 exam, I’ve even seen a formula asked that came from L1, and the formula was in a small obscure area in the L2 curriculum as a side note. My advice for L2 is don’t try to guess what’s on/off the exam. There is a ton of stuff to study, and it’s taking a HUGE gamble to start guessing. A few years ago, one particular accounting ratio was asked 4 or 5 times throughout the exam. That’s 4% of your exam right there. One year, a particular model was asked in one whole vignette 8 questions. 6.7% of the exam No real shortcuts to L2.
learn them. build them…you just have to do them out and then you can see the stuff in ur head. binomial trees are key fundamental in option pricing. its key for really understanding equity and fixed income derivatives. not only important for the exam, but its very usefull when learning about things after the exam…OAS, etc…
^ agree. Binomial trees are deeply cool because with some really easy math you can understand some big concepts. Just take limits on the tree and you suddenly have Brownian motion and find out that you have taught yourself stochastic calculus or even better found out that stochastic calculus can make your life easier.
binomial trees are fun. hard work to learn, but awesome feeling to get the rhythm down. practice in CFAI because the format of the trees on the actual exam is weird. minimal information.
JoeyDVivre Wrote: ------------------------------------------------------- > ^ agree. Binomial trees are deeply cool because > with some really easy math you can understand some > big concepts. Just take limits on the tree and > you suddenly have Brownian motion and find out > that you have taught yourself stochastic calculus > or even better found out that stochastic calculus > can make your life easier. how do you take limits on the tree? I’m somewhat familiar with stochastic calculus as I understand black scholes model. I’m still kind of weak on some fo the fundamentals.
Hmm… I guess the usual way is that you look at the symmetric random walk at points 0, 1, 2,… and step sizes of +1 or -1 so for instance C(n) = sum of n coin flips where you get +1 if you have a head and -1 if you get a tail. Then you make the process continous by saying C(t) = the interpolated process (i.e., draw a line from all the C(n)'s to the next one). Then let Wn = 1/sqrt(n)*C(t). Then let n -> infinity. All those binomial problems can be stated as problems about C(n) and then W[n] pretty much inherits all the results you got on C(n). But some of those results are a pain in the butt because youre dealing with that n choose r stuff and sums and we just don’t have very good machinary for sums (mostly) except to approximate them. The cool thing is that when the step sizes get smaller and smaller the approximations become better and better. Finally, they aren’t approximations at all but results from calculus. And that opens up the whole world of chain rules, change of measure, etc that can be worked out for stochastic calc in much the way you do for any other calculus. And then problems that would be impossible for discrete cases become easy because you can use Ito’s lemma and Girsanov’s thm and all that other cool stuff to solve them. Of course, the answers you get are wrong anyway in finance because all those stationary Markov kinds of assumptions are wrong, but you can still do really cool math (I especially like change of numeraire arguments that make impossible problems go away with a flick of the wrist).
Holy Sh!t, the legend JDV is back!!! How the hell did this happen? Where were you sir?
I’ve been working hard…
for tha money…soooo hard for the money…