I would too haha. The EAR question on the 2016 paper was worth 8 minutes and it might have taken me 5 at the most. Unfortunately though, what gets tested seems to change quite a bit from year to year.
I have run into this issue as well, but these questions are worth, usually, 6-8 points each. I would be willing to bet that the maximum for the right ending answer is 1-2 points, so if you write out everything that goes into the answer, you should be able to get half credit, I would imagine.
Calculations are the easiest part of L3, especially after L2 drilling. Conceptual questions are much harder. Combination of both may be tricky.
Borrow and reduce eff int> -callpr-callint
lend and increase eff int> +putpr +putint
purely exam purpose haha
i find this concept fairly straight-forward. that being said, if i looked at your equation at the top, and thought i had to memorize that, i would probably quit life. the actual calculations seem intuitive to me, though. figure out the put/call premium’s FV first (only trick here is remembering to add the basis points to Libor, imo). then from there you simply calculate both the interest on the loan (simple) and the payoff on the call/put (simple) and aggregate everything. I don’t know, there are much tougher concepts on this thing for me!
Krok given the high quality of your posts over the last little while, believe me when I say this, you can do it!
I too initially had trouble, but once you get the conceptual under your belt - your golden. like jaywill said above think of it as cash in vs cash out
example:
In 90 days from now we need to borrowing money (say $1 million) *cash inflow* and will have to repay P+I at Maturity *cash outflow* (say in 1 year), but we are worried that interest rates may rise between now and 90 days
So today we buy a call option *cash outflow* to hedge rates rising.
So lets compile our cash ins and cash outs
Today: Buy a call: outflow In 90 days: recieve Loan: inflow In 1 year +90days : payback loan and interest :outflow
Issue: we have 3 time markers to consider, but essentially need a PV and a FV. So to make these values compatible, we take the Future Value of the call option(to 90 days) and deduct this from the Loan.
So we’re left with: At t=90: Net cash inflow (Loan Proceeds - FV cost of option) At T(maturity): Payback loan and interest
and voila we have, FV, PV, N, solve for i (your effective annual interest rates).
Now of course this is oversimplified, but its the general gist. there will be some variations with borrowing/lending, when is interest due, Libors + spreads, annualizing the rate, etc. But conceptually at the end of the day its simply cash in vs. cash out.
If you’re willing to give it a go, after reading this, check out the 2016 CFAI AM exam and try to apply it - i think it will really resonate.
Again, given the quality of your posts - i have no doubt in my mind you’ll do well this Saturday. But with the CFAI you never know what to expect haha.
Hope this helped and best of luck!
***EDIT: feel like an idiot, just only now noticed you started this thread early may. Thread was bumped and assumed it was recent. I’m sure you would’ve gotten it by now.
He posted this a month ago. I believe he is more confident now:)
Haha yeah i noticed after i hit post, but spent too much effort writing that post, leaving it up for anyone else that may benefit from it.
What’re your plans for August 8? are we all meeting up, starting a big bonfire with our notes and books and dancing around it like tribal men haha
After this exam I’m going to reserve the treatment of rehabilitation in the thermal baths.