I'm always asking for advice on here.. I thought I'd give some regarding derivatives

Disclaimer: I’ve never taken the L2 and struggle with vitrually every topic lol

If you are strong with the financial derivatives section you can ignore this post. If you’re like me and have struggled nailing down the swap valuations, FRAs, etc… then please read on.

Like most of you I’ve been studying a ridiculous amount the past 4-6 weeks but I’ve never been able to nail down most of the derivatives section regarding solving the equations. It has been a weak point on my mocks. Therefore, I buckled down last night and studied into the night by meticulously going through the EOC problems and CFAI material. (not Schweser as I’ve done previously). I am so glad I did that.

If you’re struggling with derivatives I highly recommend you spend the time to go through the EOCs thoroughly. I feel 20 times more confident for derivatives now. It seems so easy to me now that it’s hard to believe how much I struggled with them (which was a lot).

I also recommend calculating out all of the swap equations using PV factors as they instruct in the curriculum (unless of course you’ve mastered this already in your own way). Being naive (and probably a little arrogant), I thought I could just conceptually figure out the problems with valutaion for swaps and not have to spend time learning and memorizing the CFAI way of calculating. Big mistake.

I hope I was able to pay it forward to at least one person out there. AF has been a huge help to me this last month. Thanks to all the posters and people who have responded to my questions. Stay strong, keep working, and don’t surrender to the ever luring temptation of apathy!

I will be on here for more help this fall lol, hopefully with those of you that have passed in the level 3 forum. If not, I will be on here for L2 again because failure is not an option!!

TLDR - go through DI EOCs

I wrote something similar in a topic last week I believe. I had gone CFAI/Schweser back to back for almost all the readings but then towards the end got lazy and just did Schewser derivs. I solved their EOCs simple enough and thought I was good to go.


I, like you, had to spend a painstaking day or two going through the CFAI readings and EOCs to get everything to click. With that being said, I still struggled with the first two questions in the Kesselaar case of the AM mock. Yikes!

  • A reciever swaption is simillar to call option on a bond, a payer swaption is simillar to a put option on a bond. The payoff’s are identical.
  • Valuing a forward contract takes the spot price today (less any present value of cash flows) minus the present value of the forward contract price. A forward currency is valued the same, but the spot price is discounted at the base currency rate, while the forward is discounted at the price currency rate.
  • To calculate the value of a currency swap, calculate the PV of both payments in their denominated currencies, then convert the foreign PV in domestic terms by dividing by the spot rate at initiation (old), then convert back to the new spot rate today in local terms. Take the difference of Recieve and Pay times principal for your payoff.
  • Long payer swaption = Short reciever swaption (not in cost)
  • Long reciever swaption = Short payer swaption (not in cost)
  • Most of FRA swap credit risk is in the middle of the term, currencies at the end.
  • Value for SFR = (1+FC)*z1 - SFR(z1+z2+z3+z4)+z4
  • Delta hedge number of shares = delta ratio * number of calls, or d= s/c
  • For the call-put parity in futures, simple replace S0 with Ft/(1+r)^t since they are identical
  • Caps = call on interest rate or puts on bonds.
  • Floors the opposite
  • Collar is a long cap, short floor for floating payments
  • Collar is a long floor, short cap for floating bond recepits