CFA® Derivative Investments
Summary, Syllabus, Topics, and Sample Questions (L1, L2, L3)​

Derivative investments are financial instruments that derive their value from an underlying asset, which can include stocks, currencies, commodities, or interest rates. Initially designed for hedging commodity risk, over time, they have evolved to serve as tools for investors to manage various forms of risk and achieve higher returns compared to traditional investments. Broadly speaking, derivative investments fall into two categories: forward commitments and contingent claims.

Forward commitments entail a contractual obligation between parties to execute a predetermined transaction at a future date, with terms agreed upon in advance. In contrast, contingent claims grant one party the right, but not the obligation, to partake in a prospective transaction under specified conditions.

Derivative investments are traded through two primary channels: exchange-traded and over-the-counter (OTC). Exchange-traded derivatives adhere to standardized terms and conditions, whereas OTC-based derivatives offer greater customization options to investors.

The most common Derivative Investments used by investors are:

  • Future Contracts
  • Options (call and put)
  • Forward Contracts
  • Swaps
  • Credit Default Swaps

Study Tips for CFA Derivative Investments

Understanding Derivative Investments is pivotal in modern portfolio management. To navigate this complex area effectively, consider the following key points:

  1. Derivative Investments' Unique Role:

    1. Derivative investments are distinct in portfolio management as they depend on, rather than simply correlate with, other assets.
    2. CFA Level 3 emphasizes practical implications, requiring a solid foundation in Level 1 and Level 2 derivative investment concepts.
  2. Preparation Foundations:

    1. Prior to delving into Derivative Investments, ensure a strong grasp of underlying asset classes such as equity, fixed income, and alternative investments.
  3. CFA Curriculum Focus:

    1. CFA Level 1 introduces derivatives.
    2. Level 2 covers derivative position calculations.
    3. Level 3 emphasizes strategic portfolio management using derivatives and involves complex numerical calculations.
  4. Effective Study Strategies:

    1. Memorize formulas, but aim for a deeper understanding to enhance retention.
    2. Extensive practice problems, including the official CFA Institute curriculum and resources like UWorld's QBank and Mock Exams, reinforce comprehension and calculations.

Visit our Level 1 study guide and Level 2 study guide for more details.

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Frequently Asked Questions

The best way to study for the exam is to practice with a QBank across all chapters and readings. UWorld’s CFA Level 2 exam prep allows you to review your progress and acts as a catalyst for expediting your preparation. We also suggest candidates attempt practice problems from the CFA Institute’s official curriculum for Level 2.
CFA Level 2 Derivative Investments is considered a difficult and time-consuming topic. Working from practice problems given at the end of every reading in the CFA Institute official curriculum is not enough: moving through a Qbank of other available resources is also helpful. After practicing, the best way to monitor your current understanding of the content is to take mock exams. UWorld’s CFA Level 2 test prep closely replicates the actual CFA Level 2 exam experience, thus keeping your foundations strong for the test day.
CFA Level 2 Derivative Investments is heavily sprinkled with complex calculations. That’s why complete knowledge and much more practice are the keys to success. Try to memorize formulas while doing practice problems. but see them as a mathematical representation of concepts as well.
After practicing hard with QBank, the optimal approach to assess your understanding of the content is taking Mock Exams. UWorld’s CFA mock exams closely replicate the actual CFA Level 1 exam to help you prepare and boost your confidence on test day. Like the actual CFA exam, our mock exams consist of two 2-hour and 15-minute sessions (4.5 hours total), each with 90 multiple-choice questions unique to the mock exams. The question topics and the order of the topics follow the CFA exam design to give you a truly exam-like experience.
Understanding the concept first and then going through the structure of the formula will help you grasp the formula. Think of the formula as the mathematical representation of the concept. As you build this foundation of understanding, reinforce it through repetition and application. Look at our CFA L1 Formula sheet for further resources and tips.
For optimal exam readiness, immerse yourself in thorough practice across all chapters and readings using a Qbank. UWorld’s CFA Level 3 test prep for 2024 goes beyond the basics, offering a comprehensive package. This includes video lectures, smart decks, formula sheets, performance review features, and effective learning strategies. With these resources, UWorld ensures your exam experience is not just adequate but truly up to the mark, providing a robust foundation for success.

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