Last minute tips: Eliminating impossible choices
There are more than a few cases where you can clearly eliminate (usually) 2 of 4 choices, and given the estimating passing score is around 50-55%, this gets you awful close to passing.
Derivatives:
- If an option is in-the money, its value must be at least the value in the money.
Example: If a call option has a strike of 35 and the stock price is 40, it must be at least 5. Any answer choices less than 5 can be eliminated
- Same goes for interest rate swaps (swap rate vs spot/futures/par rates that are all below/above fixed rate)
- An option before expiry is worth more than zero.
- Up-factor in binomial model exceeds 1. Probability of up cannot exceed 1.
Auto-regressive models:
- They are weighted averages of past and current data, so the number must fall within those two
Fixed income:
- Convexity is always positive
- Dirty price (with accrued interest) is always greater than clean/quoted price
- Interest rates are always positive (in exam setting), so present value is always less than future value.
Others:
- Expected shortfall (TVaR, CVaR) is always smaller than VaR