Practical study tips - Swaps and swaptions

Hi L2ers. When I look back at my L2 preperation days, there’s this one little piece of advise that I think can be quite useful for people who dont really work with derivatives in their jobs as was my case. We tend to fucus too much attention almost mechanically on cash inflow and outflow and their timings in interest rate swaps and swaptions.

Firstly, in my experience, derivatives is one topic you may want to give a good and thorough reading the day before the exam as a part of your final revision. I would have bombed derivatives if I had not had a good read a day before the exam. Unlike equity which I have worked with for many years, derivatives is not an area where I can use my brains and experience to work my way through a problem.

Secondly, rather than mechanically focussing on cashflows and their timings, it makes a world of difference to fundamentally understand what a swap or swaption exactly does. When does it gain or lose value. Make your own examples to get a better grip on the core concept and you would be able to narrow down the options on the exam even when faced with a complex problem.