CFA level III errata 0319

Change Log for CFA 2019 Level III
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 2 / 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

2.2 Excess Returns

SS12. Fixed-Income Portfolio Management (2) / R25. Fixed-Income Active

Management: Credit Strategies / Lesson 2

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 1 minus the recovery rate equals loss severity.

02/28/2019

SS17. Risk Management Applications of Derivatives / R33. Risk Management
Applications of Option Strategies / Lesson 1 / Study Text

Example 1.2
Solution:
Ai. Value at initiation = V0 = S0 + p0
Aii. Value at initiation = V0 = S0 + p0

Page 1

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 1 / Study Text

SS17. Risk Management Applications of Derivatives / R33. Risk Management
Applications of Option Strategies / Lesson 1 / 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 + 0 = $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 + 0 = $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 + 0 = $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 2

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 1 / Study Text

1.1.4.4 Box Spread

SS17. Risk Management Applications of Derivatives / R34. Risk Management

Application of Swap Strategies / Lesson 3 / Study Text

Example 3.1 Question 1 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 3

www.efficientlearning.com/support/updates