Change Log for CFA 2019 LevelIII Date Lesson and Content Identifier Change 02/22/2019 SS5 Private Wealth Management (1) / R11 Taxes and Private Wealth Management in a Global Context / Lesson / Study Text First equation under 2.1.3.1.1 Accrual Equivalent Return should read: 03/07/2019 SS12 Fixed-Income Portfolio Management (2) / R25 Fixed-Income Active Management: Credit Strategies / All lessons LOSs list Reading 25 in the overview, but 24 throughout the lesson text Please note that all LOSs throughout the text should also correlate to Reading 25 (not R24) 03/07/2019 SS12 Fixed-Income Portfolio Management (2) / R25 Fixed-Income Active Management: Credit Strategies / Lesson 2.2 Excess Returns SS12 Fixed-Income Portfolio Management (2) / R25 Fixed-Income Active Management: Credit Strategies / Lesson Example 2.3 03/07/2019 Excess return rX on a credit security can be thought of as the spread s multiplied by the percentage holding period of the year t, multiplied by the product of change in spread minus the spread duration Ds of the bond: Solution: The correct answer is A Recall that minus the recovery rate equals loss severity 02/28/2019 SS17 Risk Management Applications of Derivatives / R33 Risk Management Applications of Option Strategies / Lesson / Study Text Example 1.2 Solution: Ai Value at initiation = V0 = S0 + p0 Aii Value at initiation = V0 = S0 + p0 Page www.efficientlearning.com/support/updates 02/21/2019 03/04/2019 SS17 Risk Management Applications of Derivatives / R33 Risk Management Applications of Option Strategies / Lesson / Study Text SS17 Risk Management Applications of Derivatives / R33 Risk Management Applications of Option Strategies / Lesson / Study Text 1.1.4.1 Colllars Correction as follows to “Profit at option expiration” Profit at option expiration=VT−V0=ST+max(X1−ST,0)−max(ST−X2,0)−[S0] 1.1.4.1 Example 1.6 A trader buys a stock at $27 a share Subsequently, he buys a put option on the stock with an exercise price of $20, time to maturity of six months, and a premium of $2.50 He also sells a call option with the exercise price of $38 on the same underlying stock and same time to expiration; the premium is the same as the put, $2.50 His portfolio is: S0 + p(X = 20) − c(X = 38) Regarding this option collar: A Compute the strategy's value at expiration and profit if in six months of time at expiration the stock price is: i $17 a share ii $29 a share iii $52 a share Solutions: A i When the terminal stock price is $17: Value at initiation = V0 = S0 + [p1 − c2] = S0 + = $27 Value at option expiration = VT = ST + max (X1 − ST , 0) − max (ST − X2, 0) = 17 + max (20 − 17,0) − max (17 − 38,0) = $20 Profit at option expiration = VT − V0 = 20 − 27 = −$7 ii When the terminal stock price is $29: Value at initiation = V0 = S + [p1 − c2] = S0 + = $27 Value at option expiration = VT = ST + max (X1 − ST , 0) − max (ST − X2, 0) = 29 + max (20 − 29,0) − max (29 − 38,0) = $29 Profit at option expiration = VT − V0 = 29 − 27 = $2 iii When the terminal stock price is $52: Value at initiation = V0 = S0 + [p1 − c2] = S0 + = $27 Value at option expiration = VT = ST + max (X1 − ST , 0) − max (ST − X2, 0) = 52 + max (20 − 52,0) − max (52 − 38,0) = $38 Profit at option expiration = VT − V0 = 38 − 27 = $11 Page www.efficientlearning.com/support/updates 02/21/2019 02/22/2019 SS17 Risk Management Applications of Derivatives / R33 Risk Management Applications of Option Strategies / Lesson / Study Text 1.1.4.4 Box Spread SS17 Risk Management Applications of Derivatives / R34 Risk Management Application of Swap Strategies / Lesson / Study Text Example 3.1 Question correction: An option box spread is a portfolio of four option positions: a long bull spread with call options and a short bull spread(bear spread) with put options All four options share the same underlying stock and the same time to maturity A box spread is (c1 - c2 + p2 - p1) A trader buys a box spread to lock in a fixed terminal value of (x2 - x1) The box spread portfolio is a synthetic risk-free bond Traders use box spreads to explore arbitrage opportunities, when option prices are not correctly set Notional Pay Receive A $80 million Return on S&P 500 Index Return on Oracle shares B $60 million Return on S&P 500 Index Return on Oracle Shares C $60 million Return on Oracle shares Return on S&P 500 Index Page www.efficientlearning.com/support/updates ... profit if in six months of time at expiration the stock price is: i $17 a share ii $29 a share iii $52 a share Solutions: A i When the terminal stock price is $17: Value at initiation = V0 =... + max (20 − 29,0) − max (29 − 38,0) = $29 Profit at option expiration = VT − V0 = 29 − 27 = $2 iii When the terminal stock price is $52: Value at initiation = V0 = S0 + [p1 − c2] = S0 + = $27