# what to focus on in derivatives?

well, it’s coming down to the wire. due to a personal situation, i am further behind than i would likely to be. i felt the same with level one and level two and passed those 2/2, so i guess anything is possible. i need to review ss 8, 9, 10, and 12 in the coming days and will have the week before the exam off to review and drill practice exams / questions. i am feeling comfortable about the sections i have covered so far and am scoring well on hard practice questions. HOWEVER. i am getting owned by derivatives (ss 13). the math is pretty easy i guess, but i am not one for memorizing formulas. i ran out of time at level 2 and threw in the towel on derivatives (guessed on both vignettes – ouch!), but i’d like to at least pick up some of the low hanging fruit this time to offset any randomness in the written section that might bring my score down. if i can get even 1/3rd of the points, that will be a large help. any suggestions on what to focus on for fast(er) easy(er) points? the spread, stradle etc. stuff seems the easiest, but it is the longest. thanks. STAY POSITIVE.

know how to alter beta and/or duration for a portfolio know the reasons for using each option strategy even if you don’t know the exact formulas know the basics of swaps and FRAs (how to convert floating to fixed and vice versa)

i wonder, if someone already had experience with taking Lvl 3, does passing (or at least going through them…) the sample tests have any predictive power?

The 3rd one on that list is the one I struggle with most but also the one that is probably most likely to show up on the exam given how simple and straight forward the first two are.

the weighting in L3 of derivatives is the same as in L2 – 5-15%. i was definitely hoping for 5% (only 6 questions) at level 2 but got nailed with 10%. i am assuming it will be 10% this year as well since the readings are very long. i doubt it will be 15% because there is just “too much good stuff” in the curriculum for them to spend 3 vignettes on derivatives. anyway, i also do not like swaps. i would count on them being on the test, but most of the other major topics should be there as well, and i think some of the others are easier (at least for me).

PJStyles Wrote: ------------------------------------------------------- > The 3rd one on that list is the one I struggle > with most but also the one that is probably most > likely to show up on the exam given how simple and > straight forward the first two are. Yeah, it is easy to get tripped up on this kind of problem. I just break it into 3 parts: 1) what the investor is currently paying or receiving (i.e. fixed or floating) 2) the side of the swap that is the what the investor wants to pay or receive 3) the opposite side of the swap Add the three parts to get the net effect Ex: 1) investor issued floating debt and is paying L. he wants to swap to a fixed payment because he thinks rates will go up 2) a payer swap exists that allows someone to pay a fixed rate of 6% 3) the opposite side of the swap is receive L + 100bp To add them (receive is “+” and pay is “-”): - L - 6% + (L + 1%) = -5% Now investor pays 5% fixed. He still actually pays L on his debt, pays 6% on the swap, and receives L + 1% on the swap, but his net is 5% fixed.

asdffdsa Wrote: ------------------------------------------------------- > the weighting in L3 of derivatives is the same as > in L2 – 5-15%. i was definitely hoping for 5% > (only 6 questions) at level 2 but got nailed with > 10%. i am assuming it will be 10% this year as > well since the readings are very long. i doubt it > will be 15% because there is just “too much good > stuff” in the curriculum for them to spend 3 > vignettes on derivatives. > > anyway, i also do not like swaps. i would count on > them being on the test, but most of the other > major topics should be there as well, and i think > some of the others are easier (at least for me). it seems like the topic weightings are always in the middle of the ranges.