CFA CFA Level 3 LOS 37b (Level 3)

LOS 37b (Level 3)

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    • Marc
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      I’m hoping someone who has been through Level 3 can help me with this.

      LOS 37b reads: “Calculate and interpret the value at expiration, profit, maximum profit, maxi­mum loss, breakeven underlying price at expiration, and general shape of the graph for the following option strategies: bull spread, bear spread, butterfly spread, collar, straddle, box spread; ”

      At this point, I’m thinking that knowing the “general shape of the graph” and the situations in which each strategy might be used is about my limit. I have read comments that suggest CFAI isn’t really going to expect us to remember all of these formulas.

      Obviously, there’s a chance that every one of the formulas used in this chapter could show up on the exam. But, realistically, what level of detail did you feel comfortable with going into your Level 3 exam?

    • AjFinance
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      @Marc I haven’t revised this topic yet. But I feel more comfortable getting a gist of what exactly will help you breakeven, result in maximum profit, loss etc, rather than concentrating on the formulas and the confusing notations. I remember going through one of the Schweser lecture videos wherein they pointed out the same thing. Its more important to imbibe the general idea and get a feeling of what results in what, because in my opinion all those strategies have the same underlying, basic idea. Just concentrate on understanding the topic, rather than bothering with the exact formula and notations.

    • Zee Tan
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      @Marc from what I remember, the questions around these normally are “Investor X suspects Situation A is going to happen. In order to profit, which of the following two should be combined?”

      Followed by 3 combinations of derivatives (e.g. short call & short put, long put and short call, long call and long put) etc.

      Then a follow on question may ask you what that particular configuration is called.

      Basically the idea is you have to be clear which way should you lean in any situation in order to hedge your position sufficiently. The confusion will come from the combinations – at least that’s what the trouble always have been for me.

    • Sophie Macon
      Keymaster
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      @marc, the derivatives chapter always scare people off, especially when you read wordy LOS.

      In fact, this section of derivatives require the least memory, as it’s all about logic. Whether it makes sense. All you need to know is the basic ‘hockey stick’ payoff chart for put and call options. That’s it.

      The rest is just combinations of them. And the thing you only need to remember is the name (bull call spread etc) for those combinations.

      Practice with drawing the charts, labelling the strike prices (x-axis), and payoff (y-axis). Take into account premium etc when doing this.

      Don’t worry, if you have any questions, just start a new discussion thread on those, always best illustrated through examples.

    • Marc
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      @sophie, @zee,

      As always, thank you. I can certainly picture the various strategies and identify when to use them.

      I also understand that any profits on these strategies are net of the cash flows to/from premiums. I’m just wondering if I should be worried that they would ask a question to the effect of: “What is the maximum loss that could be incurred for…?” or “At what price for the underlying would this strategy experience its maximum loss?”

      Is that too much detail to expect?

    • Sophie Macon
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      @marc, I think those questions are what you should expect. They are rare, but I have come across them before, and it is in the LOS so CFA would probably expect you to know this.

    • Marc
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      @sophie,

      Thanks. That’s about the level of detail that I was expecting, so that’s comforting.

      My sense is that they would test this in the afternoon portion of the exam as opposed to making part of an essay question. Is that correct?

    • Sophie Macon
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      @Marc, most likely it’s an item set question. But hey, you never know!

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