For many IMC candidates the algebra of finance can be daunting: annuities, option payoffs, time weighted return, not to mention interest rate parity and linear regression.
How do you approach this for the exam? We cannot reduce the number of numerical questions in the exam, but we can certainly reduce the workload and stress.
When you are studying each section, you need to think what the equations are trying to do. For instance in Equity Valuation and Fixed Interest most algebra is using the basic concept of time value of money: today’s value of a product is the present value of the likely future cash flows.
Some equations can be reduced by logic, often enabling you to skip the maths altogether. Macaulay duration looks frightening, but if you think of it as “How long are we waiting, on average, for the cash?” then the answer may be obvious. If a 5 year bond has Macaulay duration of 2, 4, 6 or 8 years, then we know most cash is received at time 5, with smaller amounts earlier – hence 4 is the only feasible solution.
Trying to understand the algebra, rather than rote learning it, will make studying far more productive (and interesting!). It should also help you succeed first time in the IMC exams.
Quartic Training has a one day on-line financial maths course for £60.00 Inc VAT. please contact Quartic Training for more information.