As an expert in the field of finance and investments, I have had the opportunity to guide and mentor many aspiring Chartered Financial Analysts (CFA). One question that I often get asked is whether CFA Level II derivatives are hard. My answer to this is that while it is the most challenging of the three levels, with proper planning and preparation, one can easily overcome this hurdle and move on to the final level. Personally, I have found fixed income and derivatives to be the most difficult topics in the CFA curriculum. This is because derivatives can be an abstract concept for those who have not studied or experienced it before.
However, with dedication and hard work, one can master this topic and excel in the exam. One of the reasons why derivatives may seem daunting is because each LOS reading for this topic is relatively short compared to other areas in the CFA curriculum. Additionally, derivatives also have a low weightage on the exam, along with portfolio management and alternative investments. However, it is important to note that portfolio management will be further explored in the final level, so having a general understanding of the concepts at this stage will be beneficial. It is also worth mentioning that CFA Institute does not endorse or guarantee the accuracy or quality of products and services offered by third-party providers such as Kaplan Schweser. While these study materials can be helpful, it is important to rely on official CFA Institute resources for accurate and up-to-date information. The foundation for understanding derivatives is laid in Quantitative Methods at Level I, but it is at Level II where these concepts are explored in more detail.
This level delves into portfolio and investment management, testing your ability to apply these concepts to real-life scenarios. The focus of the Level II exam shifts towards evaluating different asset classes and applying the concepts learned in Level I.The CFA Level II exam is known to be quite difficult, as it requires candidates to not just understand the concepts, but also apply them in practical scenarios. This is where proper planning and preparation come into play. It is important to not just memorize formulas and theories, but also practice applying them to different scenarios. One of the key areas of focus in Level II derivatives is the pricing and valuation of term commitments and contingent loans, which were briefly introduced at Level I.
An example of a CFA learning outcome for derivatives is to “describe the basic characteristics of derivative markets and contrast the markets for over-the-counter and exchange-traded derivatives”. These learning outcomes refer to the specific skills and concepts that candidates should possess within an exam topic, while exam topics describe the broader set of knowledge that should be acquired. Passing the Level II exam not only demonstrates your dedication to your career and learning, but it can also open up more opportunities in your professional life. While Level I focused on basic knowledge and understanding of investment valuation tools and concepts, Level II takes it a step further by testing your ability to apply these concepts in real-life scenarios. In order to be eligible to take the CFA Level II exam, one must have a bachelor's degree or equivalent education and must have passed the CFA Level I exam. The level and amount of technical content evaluated at Level I for derivatives are much lower compared to other topics such as fixed income.
However, it is important to have a solid understanding of the fundamental concepts at this stage as derivatives are present in all three levels of the CFA exam. As someone who is currently studying for the second level, I can relate to the feeling of not remembering much from the Economics section of Level I. This is why I recommend starting with the Schweser CFA Level I SchweserNotes for Derivatives, which not only provide a comprehensive overview of the topic but also include illustrative examples and module questionnaires to check your understanding.
