The last 3 readings (options/Swaps/Risk management strategies) were quite confusing and caused trouble during the practice questions and EOC. Considering that Derivatives contains a lot of material for just 5%, how did you deal with this section?
Learn it the best I could. Focused on it once I mastered everything else – but what are you confused about?
For minimum and maximum values of options, why is European put options discounted at the risk free rate while American put options are not discounted. This logic doesnt apply to European call/American call options.
I did not read CFA textbook on this topic. You may read Mcdonald’s “Derivatives Market” if you have one. This one is good.
I had already learned about derivatives and the way it’s in this exam it can be a little tricky. Read it once. Do a lot of problems. Read it again. Do more problems. It’s really dumb to now try to get perfect score here since its really points here. First time will be tricky but after you do get a lot of problems wrong find out were you doing wrong and repeat. With some works this will be some easy points. Also look for th Schweser videos. They helped me for level 1 in derivatives at least and the secret sauce during review it refreshed some details.
It becomes easier after you have valued a swap for the first hundred times.
using the book
This is all rusty, but isn’t it because you can’t exercise European bonds until maturity?
If you’re really pressed for time, focus on remembering the key formulas so that you’ll be able to knock off at least a couple of the questions on the exam. Obviously this is not ideal, but often your time is better spent on more important topics…
like someone mentioned above, you have to discount european options because they can only be exercised at the expiry date ie at a future date. the maximum value of an european/american call is the spot/market price (because no one will be willing to pay more for the option than the market price of the underlying) of the underlying and that is already in PV terms (market price is price at time 0) ,therefore no need to discount. the maximum value of a put option is strike price (no one is willing to buy a put for more than the maximum they are hoping to sell the underlying for). however for an european put, you only settle at the expiry date in the future and thus the need to discount the strike price from expiry date to present value terms. for an american put, you can exercise now so the maximum will be the exercise price now, time 0 therefore no need to discount.
hope this makes sense!