Study Notes for CFA® Level II – Derivatives – offered by AnalystPrep

12 Aug 2021

Reading 33: Pricing and Valuation of Forward Commitments

-a. Describe the carry arbitrage model without underlying cashflows and with underlying cashflows;

-b. Describe how equity forwards and futures are priced, and calculate and interpret their no-arbitrage value;

-c. Describe how interest rate forwards and futures are priced, and calculate and interpret their no-arbitrage value;

-d. Describe how fixed-income forwards and futures are priced, and calculate and interpret their no-arbitrage value;

-e. Describe how interest rate swaps are priced, and calculate and interpret their no- arbitrage value;

-f. Describe how currency swaps are priced, and calculate and interpret their no- arbitrage value;

-g. Describe how equity swaps are priced, and calculate and interpret their no- arbitrage value.

Reading 34: Valuation of Contingent Claims

-a. Describe and interpret the binomial option valuation model and its component terms;

-b. Calculate the no-arbitrage values of European and American options using a two-period binomial model;

-c. Identify an arbitrage opportunity involving options and describe the related arbitrage;

-d. Calculate and interpret the value of an interest rate option using a two-period binomial model;

-e. Describe how the value of a European option can be analyzed as the present value of the option’s expected payoff at expiration;

-f. Identify assumptions of the Black–Scholes–Merton option valuation model;

-g. Interpret the components of the Black–Scholes–Merton model as applied to call options in terms of a leveraged position in the underlying;

-h. Describe how the Black–Scholes–Merton model is used to value European options on equities and currencies;

-i. Describe how the Black model is used to value European options on futures;

-j. Describe how the Black model is used to value European interest rate options and European swaptions;

-k. Interpret each of the option Greeks;

-l. Describe how a delta hedge is executed;

-m. Describe the role of gamma risk in options trading;

-n. Define implied volatility and explain how it is used in options trading.

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2021-03-24

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