CFA® Derivative Investments

Summary, Syllabus, and Topics (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

Other CFA Exam Topics

Scroll to Top