Derivatives and Risk Management: CFA® Level II

It is 5–10% of the 2027 Level II exam. 21 learning outcomes across 2 learning modules.

44 practice questions and 0 formula cards on this topic in the app.

Pricing and Valuation of Forward Commitments

• Explain the pricing of equity forwards and futures, and work out their no-arbitrage value and say what it means
• Explain the carry arbitrage model both when the underlying generates cash flows and when it does not
• Explain the pricing of interest rate forwards and futures, and work out their no-arbitrage value and say what it means
• Explain the pricing of fixed-income forwards and futures, and work out their no-arbitrage value and say what it means
• Explain the pricing of interest rate swaps, and work out their no-arbitrage value and say what it means
• Explain the pricing of currency swaps, and work out their no-arbitrage value and say what it means
• Explain the pricing of equity swaps, and work out their no-arbitrage value and say what it means

Valuation of Contingent Claims

• Explain the binomial model for valuing options and what each of its terms means
• Explain how a European option's value can be viewed as its expected payoff at expiry discounted to today
• Spot an options arbitrage opportunity and set out the trades that exploit it
• Use a two-period binomial model to work out no-arbitrage values for American and European options
• Use a two-period binomial model to value an interest rate option and explain the result
• Name the assumptions behind the Black–Scholes–Merton model for valuing options
• Explain how the Black–Scholes–Merton call formula can be read as a leveraged holding of the underlying
• Explain how European options on currencies and equities are valued with the Black–Scholes–Merton model
• Explain how the Black model values European options on futures contracts
• Explain how the Black model values European swaptions and European interest rate options
• Explain what each option Greek measures
• Explain the steps in carrying out a delta hedge
• Explain why gamma risk matters when trading options
• Say what implied volatility is and how options traders use it