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

Derivative Investments are financial instruments that derive their value from another asset. The underlying asset could be a stock, currency, commodity, or interest rate. Derivative Investments were initially used to hedge commodity risk, but their usefulness has grown over the years to help investors mitigate various types of risk and earn higher returns than traditional investments. Generally, Derivative Investments can be classified as forward commitments and contingent claims. The forward commitment sets an obligation between the parties to engage in a transaction at a future date on terms agreed upon in advance. In contrast, contingent claims give one party the right but not the obligation to engage in a prospective transaction on set terms.

Derivative Investments are either exchange-traded or traded over-the-counter (OTC). Exchange-traded Derivative Investments offer standardized terms and conditions, whereas OTC-based Derivative Investments are customizable.

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

Derivative Investments are dependent on, as opposed to (more or less) correlated with, another asset, and so have a unique role in portfolio construction and management. The Level 3 CFA curriculum is more about the practical implication of Derivative Investments contracts and strategies, so candidates must have the knowledge of Level 1 and Level 2 Derivative Investments: you need to grasp the basic definitions and concepts before moving on to the more complex areas covered in CFA Level 3.

  • Make sure that you have got an understanding of the underlying asset classes, that is, equity, fixed income, and alternative investments, before starting with Derivative Investments.
  • CFA Level 1 curriculum focuses on what derivatives are, Level 2 on how derivative positions are calculated, and Level 3 on how to use and create positions in strategic portfolio management. And at all levels, Derivative Investments is heavy with numerical calculations.
  • Memorize formulas, but as always comprehending their sense will make them easier to remember.
  • Do lots of practice problems. Perhaps more than with many topic areas, practice makes the understanding and calculations involved really sink in. Practice from examples and practice problems in the CFA Institute’s official curriculum, and from UWorld’s QBank and Mock Exams.

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

SimpleSheets are your easy access to Level 1 and Level 2 Formulas!
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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 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. Take a look at our CFA L1 Formula sheet for further resources and tips.

The best way to study for the exam is to practice with a Qbank across all chapters and readings. UWorld is releasing its CFA Level 3 test prep in 2023. Until then, candidates should review the requisite Qbanks offered by the CFA Institute. We also suggest candidates do the examples along with practice problems from the CFA official curriculum for Level 3.
After moving through a Qbank, the best method to monitor your current understanding of the content is to take mock exams. UWorld is releasing its CFA Level 3 test prep in Q4 2023, which will closely replicate the actual CFA Level 3 exam experience. Candidates should practice with the CFA Institute’s mocks until then.

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