5
Concepts
5
Formulas
1
Decisions
3
Quiz Questions
This reading introduces the main derivative contract types and how they are used to transfer risk. The exam usually asks you to classify the instrument, identify who has an obligation versus a right, and calculate the payoff for a basic forward, call, or put position.
Go to the CFA Level 1 Derivatives hub| Instrument | Contract type | CFA Level 1 exam angle | Risk transfer |
|---|---|---|---|
| Forward | OTC forward commitment | Customized agreement with counterparty risk and no daily settlement. | Locks in a future buy or sell price. |
| Futures | Exchange-traded forward commitment | Standardized contract with daily mark-to-market and clearinghouse support. | Transfers price risk through margin and daily settlement. |
| Swap | Series of forward commitments | Exchange cash flows such as fixed-for-floating interest payments. | Transforms one cash flow exposure into another. |
| Call option | Contingent claim | Right to buy; buyer's maximum loss is the premium. | Upside exposure with limited buyer loss. |
| Put option | Contingent claim | Right to sell; payoff increases when the underlying falls below strike. | Downside protection or bearish exposure. |
A derivative gets its value from an underlying asset, rate, or index, and its exam treatment starts with whether the contract creates an obligation or only gives one party a right.
Forwards, futures, and swaps obligate both sides to transact. Calls and puts give the buyer a right but not an obligation, so the premium is the buyer's maximum loss.
Long forward payoff is spot at expiration minus forward price. Call payoff is max(0, spot minus strike). Put payoff is max(0, strike minus spot).
5 concepts covered in this module.
OTC agreement to buy/sell asset at predetermined price on future date. Customizable. Counterparty risk. No upfront cost.
Exchange-traded standardized forward. Daily settlement (mark-to-market). Clearinghouse eliminates counterparty risk.
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5 essential formulas for this module.
Where: ST = spot price at expiry, F0 = forward price
Where: X = strike price
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1 decision frameworks to guide your analysis.
Visual overview of how concepts connect in this module.
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Forward Contract
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