# what to do with derivatives

I am really frustrated, during april I spent two weeks studying derivatives and went through so much crap did every EOC questions, I now remember nothing, only the basics and when doing BS mocks like schweser I cant even react to the calculation questions, I have no idea how to do the actual calculation during mock, I wonder if I should just give up on the dumb derivative calculation? How you guys pick up the section quickly? There are so much stuff

Take a deep breath then relax…

Derivatives has actually turned into one of my stronger areas but it took a bunch of time and practice. One thing that really helped me was I took a single sheet of paper and drew out a “mind map” sort of document and went through each type of derivative (futures, forwards, caps/floors, options, etc.) and wrote out the equations for price and for value as well as a few of the main points for each. It took several hours but I really felt like I got a better handle on it after doing that.

Try it out. If it doesn’t work then I say just play damage control. Learn the basics and try to be able to consistantly get 3/6 on the derivatives cases. The cap on the derivatives material is 15% and there is a lot of overlap with derivatives and fixed income so I bet a safe strategy would be if you just go with the basics on Derivatives then study heavy on the fixed income - I wouldn’t blow off both. I feel that if they go heavy on derivatives they may go a little lighter on fixed income and vice versa. This way if you hit home runs in the fixed income it may be okay to hit singles or even strike out on the derivatives. It will balance out.

Get they keys of what is going on with the contract and what the owner wants to happen. Swaps, FRAs, Caps, Floors etc. You can figure out a big part of the questions by knowing those keys. From there just learn the basics of calculating the Swap rates, FRAs etc. Valuing them at a given period of time would an added bonus but get the first parts down for sure.

I wrote a host of articles on pricing and valuing derivatives, starting here: http://www.financialexamhelp123.com/level-ii-derivatives/

They’re not all that difficult. Seriously. Spend a little time poring over the articles and you’ll agree.

Full disclosure: as of 4/25 I’ve installed the subscription software on my website, so there’s a charge for viewing the articles.

haha i saw that and subscribed, under the same name!

I was in the same boat as you with derivatives. I felt frustrated and had no idea how to tackle questions.

I have spent like 3 hours tonight slowly going through every single EOC question in full detail and using a formula sheet in front of me. whilst I am not an expert in this area my confidence has grown hugely. It’s one of those areas that needs practice thats all.

My CFA tutor told me that people hate derivatives but that its silly because in reality its one of the few areas of the exam you should be trying to get maximum marks. Keep plugging away!

I remember did EOC question back in march it took forever, how long did it take you this time?

you can do it.

there’s no rule that says that, after reading, hitting blue boxes, and going the EOC, you should know a reading. anymore, really, than that you should know how to do carpentry after a shop class.

you have a very good base. maybe you’re weak right niow, but you’re just inches from having some strength.

for me, the blue boxes are playing a bigger roe in L2 than L1. i go through them slowly, 2-3 times each – depending – and internalize, not what CFAI wants me to know, but what the basic principles are of the thing. from that position, some equations become basically obvious.

for sure, forwards and futures have less of a learning curve than the rest. perhaps try tackling just those two; very good chance I think that you’ll pick up points through that. Key issue though is that there are differences in treatment of currency forwards between Derivatives and Economics; may be good to do futures, forwards and R13 all at the same time.

Bluebox you mean the samples in blue box on EOC?

Yes. i feel the curriculum is, if anything, too thin for what they’re testing. i mean, FRA would be much easier if i had spend 3 years auditing banks. i took every blue box in intercorporate and wrote it out by hand, then rebuilt that in excel using equations to understand the flows, then went to sleep and the next day pasted that worksheet into a deck with a bunch of arrows and labels etc. what had made sense the day prior looked totally strange and foreign the next day. but after 2-3 min i started to remember how it clicked; being able to see the equations in excel helped.

did the same sort of thing for Swaps. Since swaps function like bonds, and i understand bonds a little bit, i built a currency swap Blue Box example as a bond. Here, what the ****. i’m so naive i though cfai invented the discount factor concept. i realize now how useful it is, but it annoyed me. honestly, when you crack swaps you’re like, “how was this hard?” it is crazy-hard until it clicks.

i didn’t do that for forwards or futures, but watched several youtube videos to wrap my head around FRAs.

it took me a bunch of time and practice, it has actually turned into one of my weakest areas.

I feel that cfai derivative questions are easier than schweser. The schweser ones are convoluted as heck, I don’t even know what the **** they’re rambling on about.