Derivative Instrument and Derivative Market Features
2024 Curriculum
CFA Program Level I
Derivatives
Refresher reading access
Introduction
Earlier lessons described markets for financial assets related to equities, fixed income, currencies, and commodities. These markets are known as cash markets or spot markets in which specific assets are exchanged at current prices referred to as cash prices or spot prices. Derivatives involve the future exchange of cash flows whose value is derived from or based on an underlying value. The following lessons define and describe features of derivative instruments and derivative markets.
Learning Outcomes
The member should be able to:
- define a derivative and describe basic features of a derivative instrument;
- describe the basic features of derivative markets; and
- contrast over-the-counter (OTC) and exchange-traded derivative (ETD) markets.
Summary
- A derivative is a financial contract that derives its value from the performance of an underlying asset, which may represent a firm commitment or a contingent claim.
- Derivative markets expand the set of opportunities available to market participants beyond the cash market to create or modify exposure to an underlying.
- The most common derivative underlying assets include equities, fixed income and interest rates, currencies, commodities, and credit.
- OTC derivative markets involve the initiation of customized, flexible contracts between derivatives end users and financial intermediaries.
- ETDs are standardized contracts traded on an organized exchange, which requires collateral on deposit to protect against counterparty default.
- For derivatives that are centrally cleared, a central counterparty (CCP) assumes the counterparty credit risk of the derivative counterparties and provides clearing and settlement services.
0.75 PL Credit
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