CFA CFA Level 2 Derivatives – Schweser mock Exam 1 PM

Derivatives – Schweser mock Exam 1 PM

  • This topic has 4 replies, 3 voices, and was last updated Apr-17 by Alta12.
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  • Alta12
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    Statement 1: The proper spread measure for option-free corporate bonds is the nominal spread.
    Statement 2: Callable corporate bonds and MBS should be measured using OAS.
    Statement 3: The Z-spread is appropriate for credit card ABS and auto loan ABS.

    Answer: B Only one statement is correct.

    I thought statement 2 and 3 are correct. But statement 2 is incorrect as it should have included option removed spread.

    I can’t find option removed spread in my notes. Please help. Thanks!

    Reena
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    That’s odd @Alta12 – I’m with you that 2 and 3 seems correct. Never heard of option removed spread! Is that the reasoning for the answer Schweser gave?

    Alta12
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    @Reena no reasoning provided by Schweser. They referenced it to Study Session 14 LOS 47 i. But I couldn’t find it there.

    I’m glad you think it seems odd too!

    Sarah
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    hi @Reena and @Alta12
    so yea only statement that is correct is statement 3 for the following reasons.

    It seems you both agree that statement 1 is incorrect so I won’t explain that one.

    Statement 2 Statement 2: Callable corporate bonds and MBS should be measured using OAS. is correct but the actual question says Callable corporate bonds and mortgage-backed securities should be measured using the option-added spread which doesn’t mean anything because that isn’t a methodology.

    Hope that helps @Alta12

    Alta12
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    @Diya Got it! Thanks! I should read the question more carefully.

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