L2 Derivatives - can i start with L2?

[WestCoastCandidate]

Hi there,

For my level 1 I skipped derivatives. When I say skipped – I mean I completely ignored the section and just guessed so that I could have additional time for other questions. Obviously, with derivatives being such a large part of the L2 curriculum, this strategy isn’t going to work again.

Do I now need to go back to L1 derivatives so that I can have a base for L2 derivatives or can I compensate by allocating additional time to L2 derivatives?

Essentially, does L2 derivatives pick up where L1 left off or are the core concepts reintroduced?

Thanks for your time.

WCC

[S2000magician]

It can’t hurt to real the Level I derivatives material. At Level II they’ll give you a fair amount of background, but they will assume that you’ve heard of options and swaps and forwards and futures and FRAs.

As it’s only August, I’d recommend that you take the time to study the Level I material on derivatives, then move on to the Level II material.

[dwheats]

You can if you like, or you can read the optional material in the L2, which generally gives a recap of L1 derivatives.

You could also read L1 now if you like, as it is much too early to start for L2 (unless your job requires+70hrs/week).

[Topperharley]

I’d do the recap of L1. L2 derivatives is intimidating at first. They throw a lot of big formulas at you and you need to memorize pretty much all of them save for Black Scholes Merton. Keep reading thru it though and it will just click one day and then you’ll have it. I found derivatives to actually be one of the easier L2 topics but it can be overwhelming the first time you read through it.

[S2000magician]

I’ve written a few articles on Level II derivatives that may be of some help; you’ll find them here: http://financialexamhelp123.com/level-ii-derivatives/.

[MrSmart]

@S2000magician

I’ve written a few articles on Level II derivatives that may be of some help; you’ll find them here: http://financialexamhelp123.com/level-ii-derivatives/.

Good job Bill, I’m sure this will come in handy for L2.

[dwheats]

I wouldnt waste my time reading derivates for a second time until you have mastered FRA and Equity.

Equity and FRA are twice as heavily weighted as any other topic.

I scored +70 only in ethics, equity, FRA and believe that is the reason for my passing.

[Isfijob]

@S2000magician

I’ve written a few articles on Level II derivatives that may be of some help; you’ll find them here: http://financialexamhelp123.com/level-ii-derivatives/.

I am just checking some random articles of yours there and I barely see the formulas (black font/black background)… Is it possible to make it more readable?

[S2000magician]

@Isfijob

@S2000magician

I’ve written a few articles on Level II derivatives that may be of some help; you’ll find them here: http://financialexamhelp123.com/level-ii-derivatives/.

I am just checking some random articles of yours there and I barely see the formulas (black font/black background)… Is it possible to make it more readable?

The font’s green.

What device/browser are you using to view the articles?

[Isfijob]

@S2000magician

@Isfijob

@S2000magician

I’ve written a few articles on Level II derivatives that may be of some help; you’ll find them here: http://financialexamhelp123.com/level-ii-derivatives/.

I am just checking some random articles of yours there and I barely see the formulas (black font/black background)… Is it possible to make it more readable?

The font’s green.

What device/browser are you using to view the articles?

Ah … Looks like Mozilla Firefox is really messed up on my side. Just checked the same article via IE and yes, the font is green.

Thanks.

[ABAL]

Hi West Coast,

These days I seem to be wired with this forum and it is becoming addictive and I would be quitting it for some time. But I can’t match magician but would certainly like to a put in a few words regarding Derivatives if it may help in any fashion:

It is the most intimidating (at the first pass and first glance) and the easiest topic in Level II. I still curse myelf for not acing Derivatives in my Level II (scored in the midlle range of 50-70% range). Here’s my advice:

DO NOT TRY TO LEARN DERIVATIVES BY MUGGING FORUMULAS. IN ANOTHER THREAD TO A CERTAIN OP Hardeep or whatever I SAID THE SAME THING. MUGGING WILL NEVER WORK. AND HONESTLY AT CFA LEVEL II DERIVATIVES IS AT IT’S PRIMATE FORM… JUST FOLLOW THESE PIECES OF ADIVCE AND THERE’S NO REASON WHY YOU CAN’T ACE THIS SUBJECT :

1. Always draw timelines for problems regarding FRA, Futures, Forwards and Swaps. This way you would know that it is a simple TVM thingthat is underlying.

2. Remember that a contract (FRA, Futures, Forwards and Swaps) are always priced to have 0 value at the initiation and if there is no change (which barely happens) will also expire at 0 value. In between, the timelines beacuse of chaaging market conditions (mainly the interest rates) the contract will have a positive value to one and an equivalent negative value to the counterparty. For instance the long may find the contract having positive value midway (backwardation) while the short may find losing money at the same point of time.

3. Options are options and are like a Insurance premium so it can’t have a 0 value at the begining. The buyer (Long) of an option will always needs to pay and that is the most he can lose if the option expires worthless (out of the money)

4. Mar to market features are essentially bringing in contracts that are tradable , (options are any way tradable except for OTC) so always have the market persepctive at the back of your mind while solving these trypes of problems.

5. Closing at contract midway will essentially mean taking the reverse position of the contract in order to compensate the other party.

6. Certain nuances involving hedging would mean you will need to understand the basic money flow i.e. C+ or P+ and observe the direction, while hedging you need to take the opposite direction or have the same risk transferred to another party in the same fashion that presented itself to you.

Take a print out of this and paste it on your wall while working through Derivatives. I hope you thank me someday. Ofcourse, listen to Magician Bill Campbell… I consider him my lord! ( And I mean this for not quite some time). People tend to be selfish in this forum (wait till you come to L3 forum and you would understand my Point of view) but there are samaritans like S2000 Magician Bill Campbell and few others who truly really cherish the enlightening journey called the CFA.

For all of your info, I am not a finance major 39 years of age, never studied finance beyond the basics reqd. at the MBA level for the non finance majors… but I must say this has been one hell luttva of a journey and I loved every bit of it! Hope I come out with good news August 2015 foor Level III of mine.

[dumbledore]

Everyone have their stratagies.Derivative is important because some concepts of fixed income as well economics are realated to it.As the above poster has explained you should try to understand formulasrather then bliendly cramming them.Drawing timelines will help you reduce mistakes.Also If possible dont study from cfai text.They have worst possible notations making simple concepts intidimating.

As far going back l1 it would not hurt since perhaps this is only topic that assumes level 1 understanding

[Topperharley]

@ABAL

Hi West Coast,

These days I seem to be wired with this forum and it is becoming addictive and I would be quitting it for some time. But I can’t match magician but would certainly like to a put in a few words regarding Derivatives if it may help in any fashion:

It is the most intimidating (at the first pass and first glance) and the easiest topic in Level II. I still curse myelf for not acing Derivatives in my Level II (scored in the midlle range of 50-70% range). Here’s my advice:

DO NOT TRY TO LEARN DERIVATIVES BY MUGGING FORUMULAS. IN ANOTHER THREAD TO A CERTAIN OP Hardeep or whatever I SAID THE SAME THING. MUGGING WILL NEVER WORK. AND HONESTLY AT CFA LEVEL II DERIVATIVES IS AT IT’S PRIMATE FORM… JUST FOLLOW THESE PIECES OF ADIVCE AND THERE’S NO REASON WHY YOU CAN’T ACE THIS SUBJECT :

1. Always draw timelines for problems regarding FRA, Futures, Forwards and Swaps. This way you would know that it is a simple TVM thingthat is underlying.

2. Remember that a contract (FRA, Futures, Forwards and Swaps) are always priced to have 0 value at the initiation and if there is no change (which barely happens) will also expire at 0 value. In between, the timelines beacuse of chaaging market conditions (mainly the interest rates) the contract will have a positive value to one and an equivalent negative value to the counterparty. For instance the long may find the contract having positive value midway (backwardation) while the short may find losing money at the same point of time.

3. Options are options and are like a Insurance premium so it can’t have a 0 value at the begining. The buyer (Long) of an option will always needs to pay and that is the most he can lose if the option expires worthless (out of the money)

4. Mar to market features are essentially bringing in contracts that are tradable , (options are any way tradable except for OTC) so always have the market persepctive at the back of your mind while solving these trypes of problems.

5. Closing at contract midway will essentially mean taking the reverse position of the contract in order to compensate the other party.

6. Certain nuances involving hedging would mean you will need to understand the basic money flow i.e. C+ or P+ and observe the direction, while hedging you need to take the opposite direction or have the same risk transferred to another party in the same fashion that presented itself to you.

Take a print out of this and paste it on your wall while working through Derivatives. I hope you thank me someday. Ofcourse, listen to Magician Bill Campbell… I consider him my lord! ( And I mean this for not quite some time). People tend to be selfish in this forum (wait till you come to L3 forum and you would understand my Point of view) but there are samaritans like S2000 Magician Bill Campbell and few others who truly really cherish the enlightening journey called the CFA.

For all of your info, I am not a finance major 39 years of age, never studied finance beyond the basics reqd. at the MBA level for the non finance majors… but I must say this has been one hell luttva of a journey and I loved every bit of it! Hope I come out with good news August 2015 foor Level III of mine.

…or you could just learn the formulas.