CFA Level 2: Derivatives Part 2 – Introduction
This is the second tutorial of two covering derivatives for the Level II CFA Exam. The topics of options, swaps, and credit default swaps can be intimidating for some candidates, particularly given the volume of associated formulas.
One recommended prep approach is to start with the conceptual aspects of derivatives and then apply the formulas. First, some exam questions are likely to be conceptual or at least require limited math. By understanding the theory and concepts for options and swaps, candidates have positioned themselves for success on these questions. Second, attempting to study the formulas before mastering the concepts may hinder the preparation progress if frustration settles in.
A total of two item sets (12 questions) on derivatives is a reasonable expectation. Some percentage of those questions will come from options, swaps, and credit derivatives (i.e. CDS). Application of the “Greeks”, from the Black-Scholes-Merton option pricing model is a likely suspect for one or two exam questions.
Derivatives are a middle tier subject in terms of importance. If you want to pass the exam, derivatives does not need to be your strongest subject, but you cannot afford to leave too many points on the table either. Take derivatives seriously and adapt a test tactic around your strengths and weaknesses that allows you to maximize points.
This tutorial aligns with Study Session 17 material in the Level II CFA Program Curriculum ©.
III. Interest Rate Derivatives
IV. Credit Derivatives
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- CFA Level 2: Derivatives Part 2 – Introduction
- Introduction to Options
- Synthetic Options and Rationale
- One Period Binomial Option Pricing Model
- Call Option Price Formula
- Binomial Interest Rate Options Pricing
- Black-Scholes-Merton (BSM) Option Pricing Model
- Black-Scholes-Merton Model and the Greeks
- Dynamic Delta Hedging & Gamma Related Issues
- Estimating Volatility for Option Pricing
- Put-Call Parity for Options on Forwards
- Introduction to Swaps
- Plain Vanilla Interest Rate Swap
- Equity Swaps
- Currency Swaps
- Swap Pricing vs. Swap Valuing
- Pricing and Valuing a Plain Vanilla Interest Rate Swap
- Pricing and Valuing Currency Swaps
- Pricing and Valuing Equity Swaps
- Swaps as Theoretical Equivalents of Other Derivatives
- Swaptions and their Valuation
- Swap Credit Risk and Swap Spread
- Interest Rate Derivatives - Caps and Floors
- Credit Default Swaps (CDS)
- Credit Derivative Trading Strategies