Prior to the exam, we were given mock short answer final exam questions to do (The link to the questions is below). We were also given mock multiple choice questions before the exam, and i would say those were quite useful (Link is below). Comparing the mock questions to the exam, i believe the exam questions were quite easier than the mock questions. I managed to complete the exam in 2 hours, and spent 45 minutes reviewing the paper. So overall, i felt quite confident. You may be asking "so what's in the exam?". Well, from what i can remember, here's what you should focus on (i'll keep updating/refining this list):
- Chapter 9 of Hull is expected knowledge; a foundation for the later chapters. You won't be specifically tested from it. Just know your option payoff and you'll be good.
- Factors affecting option prices (10.1 of Hull); current stock price, strike price, time to expiration etc. A must learn topic. It helps your understanding of later chapters, like Greek Letters.
- I wasn't tested on upper and lower bounds on option prices. At all. Though i can't guarantee you won't. It helps to have a solid understanding of it. They can sneak in a multiple choice question.
- Put-Call Parity (10.4 of Hull). MUST LEARN! Make sure you know how to derive put-call parity. A short answer question i got asked was to find an expression for 'r', the risk-free rate given a call and put option on the same stock, maturity and exercise price. As you can see from the put-call parity equation all you have do is manipulate for r. But the steps preceding it are important: Forming 2 portfolios and equating both positions at time 0. Everything you need to know about put-call parity is in section 10.4 and doing the following questions from chapter 10: Question 7, 11,14,15.
- Optimal exercise of an American call option, with or without a dividend. Make sure you understand both cases as to when it should be optimal to exercise. A good multiple choice question.
- Chapter 11: Was not tested on option trading strategies at all! Nothing. Nonetheless, i suggest you get a good idea of the different strategies, and try figure out the payoffs if two different strategies are combined. A question they could ask you is to give the payoff of a portfolio consisting of a straddle and strangle.
- Chapter 12: Binomial Trees. Absolutely. Study you're heart out on this. A definite short answer question (9 mark short answer question in my exam=20% of the exam) and 3-4 multiple choice questions. Make sure you can derive the derivative price using no-arbitrage arguments (12.1). The short answer question i was given was based on a one-step tree, and i was also given the stock price at 0, and the payoff function of an option in terms of the stock price i.e. S^2/100. So, an up or down movement,(u or d) will give different option payoffs T-1. Part A required me to derive how many stocks i should buy to make the portfolio riskless (See page 256). Part B required me to find the price of the option (See page 256) and finally, Part C required me to find p(probability of an up-movement). Make sure you show every step. The question is not a simple plug in the numbers into the formula. We weren't tested on two-step trees or Cox, Ross and Rubinstein assumptions. My recommendation: Do every practice question in chapter 12, as well as some of the further questions.
- Chapter 13: Wiener Processes and Ito's Lemma. There were no multiple choice questions on this chapter. However, there was a 4 mark short answer question. Learning the derivation for the different processes is not necessary. More important is how you would apply those derivations to a given question. For example, the short answer question gave us a function F(S) and we had to derive what process the function follows. Nonetheless, the topic is vast and you should have an absolute understanding of these questions from the Hull textbook: Practice Questions 1,3,5,6,10,11. Further Questions:13,16(short answer question was based on this), and 17. Going through chapter 13 initially is quite scary; but don't worry. Have at least 2 reads of the chapter, then move on to the questions at the end of the chapter. It'll all fit in. Just know how to differentiate and have a good understanding of Ito Process, Geometric Brownian Motion and Ito Lemma, and you should be good.
- Chapter 14: Black Scholes Model. There were no short answer questions on this, however there were about 5-6 multiple choice questions. For this topic, have a good understanding what assumptions are used to derive the Model, the stock process it follows for deriving the Model and and a solid understanding the different inputs that are required to solve for 'c' and 'p'. You should know what ND(1) and ND(2) mean. Reading a z-table is expected knowledge. Focus on the following questions and do the mock multiple choice questions and you should be good: Practice Question 1-10, 13-16, 29,31.
- Chapter 18: The Greeks. This is the final chapter that ties everything in. There was a short answer question about Put-call Parity and gamma, and quite a few multiple choice questions. Can't stress enough how well you need to know this topic. Know every little detail behind each letter and their relationship with each other i.e. Delta-Gamma.