For the CFA Level II exam, should I just memorize the BSM formula or actually understand the derivation?

Memorise the formula AND understand the replication argument. They are not substitutes — they answer different exam questions.

What memorisation buys you: the ability to plug numbers into a price calculation when the exam gives you $S_0$, $K$, $r$, $q$, $\sigma$, $T$ and the relevant $N(\cdot)$ values. That is maybe 30-40% of the BSM-related questions.

What understanding buys you: the ability to answer conceptual questions that the formula alone cannot answer:

• "If the expected return of the stock doubles, what happens to the call price?" (Answer: nothing — the expected return is not in the formula and replication explains why.)
• "If implied volatility doubles overnight while spot stays the same, what happens?" (The call price rises; vega is positive.)
• "If a stock pays a sudden dividend, the call price drops because…" (Holders of the call do not collect the dividend.)
• "Delta hedging breaks down when…" (When markets gap, transaction costs are large, or vol is stochastic.)

These conceptual questions are where the points pile up because they require multi-step reasoning.

My recommended split of your 80 hours:

That allocation produces an exam answer faster and more correctly than pure memorisation. The replication argument is also a transferable skill — it shows up in fixed-income (binomial trees), currency forwards, and even some corporate-finance questions.