Lets Talk Derivatives

Does it bother (and bother is putting it lightly, more like completely fed up) anyone else the amount of material contained in Derivatives and this could end up amounting to a mere 6 questions on the exam? I just spent all weekend reviewing Derivatives (still didn’t finish) and can’t help but get the feeling it will be a 1-and-done vignette. More time wasted hoooooray.

Of course, no one knows what will be on the exam, but I could easily see 2 item sets on derivatives. Seems to have much more testable material than somthing like alternative investments, in my opinion.

And it’s relatively easy, to boot.

The first time reading Derivatives I definitely felt the same. Seemed never ending and just piling on formulas. By the second review and now final review though, it is pretty easy and hoping for 2 sixers of derivatives on the exam.

The Derivative section is actually pretty elementary in the grand scheme of things. They could have made it much much worse.

This is one of the stressful parts of the Level II exam. I point more to the prospect of only one item set on Fixed Income as a source of stress. There’s a lot of complex material in Fixed Income and a new chapter reading that is also complex. Z-spread, OAS, convertibles, the MBS market the initial and effective PAC collars, embedded options, the ABS market, the complexity of the credit analysis models. You can ask some really tough questions on those topics and if there’s only going to be 6 questions on Fixed Income, I will have wasted a lot of time trying to figure that stuff out.

You can’t punt a topic though b/c if you get 2-3 item sets you’re screwed. Bombing an item set and taking a 1/6 really sets you back.

Rest assured, we’re all going to spend a lot of time studying at least a few topics that won’t even show up on the exam. That’s just the name of the game, though.

S2000 - easy? I’d disagree… im going to reread your posting… and review tonight…

Easy in the sense that you need only apply a few general principles (e.g., arbitrage applies, value = PV(what you’ll receive – PV(what you’ll pay), and if you forget a particular formula during the exam, you can work it out.

Let me know if my articles help.

Hi s2000, in mock 2013, the fixed rate are given, but why I no need to calculate the fixed rate of the contract by using Z= 1- discount factor n / sum of discount factor ? And there didn’t mention how frequent the swap is pay, why it assumed it to pay semi annually?

Howdy.

I have no idea; it seems superfluous if they’ve already given it to you.

Bonds are assumed to pay semiannually, so maybe the author thought that the same is true for swaps. As swaps are OTC contracts, they can pay with any frequency the parties desire. Maybe semiannual payments is common, but I’d expect the vignette to be explicit on that point.

idk man, even though the topics in FI are definitely hard, the questions in all the mocks so far seem pretty straightforward. but i definitely see the potential of this being a nightmare if the exam creator didn’t have his coffee that morning.

This is what keeps me up at night. I am scoring well in the mocks but upon my revision, i think what if the question asked this instead of the stated question. Most of the EOC questions are easy but there are some BB questions in the books that i know i would trip up on.

On a different note, at first i thought this extra week was a blessing but now i think its a curse and i wish the exam was this sat.

^ Definitely don’t wish the exam was Saturday as I am taking all next week off from work lol. I haven’t even looked at Ethics yet and just reviewed Econ last night which is kind of a beast itself.

I actually think FIG is very straightforward and would welcome 2 vignettes. My preferred breakdown would be:

Ethics - 10%

Corporate Finance - 10%

Econ - 5%

FRA - 20%

Quant - 5%

Alt Inv - 5%

Derivatives - 5%

Equity - 25%

FIG - 10%

PM - 5%

For econ, is it just straightforward to calculate the forward price,ppp, covered and uncovered interest rate parity?

^ yes, those aren’t hard calculations.

IMO the ‘tough’ econ questions are the cross-rate bid/ask arb types. Very easy to mess that calculation up

Nulry, in the problem u mentioned, Fixed rate was already given as morever it was equity SWAP questions, at times CFAI wants to save your time & wants to test your broader knowledge.

I think CFAI knows candidates struggle with derivatives so I think we’re going to see a couple item sets on them. Once you figure them out the forumlas are easier but I think this is an area with candidates typically struggle. I’d be surprised if there’s only one item set on this section

S2000 - why did you decide to split up each of your articles by pricing and valuing? In the books, it seems to go one after another. first you price the forward, then you value it. Would you recommend doing it your way?

No particular reason. I had to group the some way, and that seemed reasonable.

In reading them I’d probable do as you suggest: price one, then value it.

Maybe I’ll reorganize them in the future.

I do agree with you after taking more mock exams. Fixed Income material is tough, but the questions on the 2014 CFA mock weren’t all that difficult. It was my highest scoring topic. We’ll see how the exam goes, though.