Derivatives

Derivatives are financial instruments whose value is derived from an underlying asset, index, or rate. In CFA Level 2, the derivatives curriculum expands beyond basics to cover more complex concepts. The course examines forward contracts, futures, options, and swaps in depth. For forward contracts, you'll learn pricing mechanisms, valuation at initiation and during the life of the contract, and credit risk considerations. Futures contracts build on forward knowledge but add exchange-traded features, margin requirements, marking-to-market, and basis relationships. The curriculum explores hedging strategies using futures and their effectiveness. Option contracts receive significant attention with expanded Black-Scholes-Merton option pricing model applications. You'll study put-call parity, option Greeks (delta, gamma, theta, vega, rho), and volatility implications. The curriculum covers various option strategies like spreads, straddles, collars, and their risk-return profiles. Swaps include interest rate, currency, equity, and credit default varieties. You'll learn swap pricing, valuation throughout the contract life, and applications for risk management. Risk management with derivatives is emphasized, including duration-based hedging, delta hedging, and portfolio protection strategies. Credit derivatives and structured products appear in Level 2, introducing concepts like credit default swaps, collateralized debt obligations, and mortgage-backed securities. The curriculum also covers behavioral aspects of derivatives markets, including market efficiency considerations and behavioral biases affecting derivative pricing. Quantitative skills are essential as you'll encounter numerical problems requiring option pricing, swap valuation, hedge ratio calculations, and risk quantification. Understanding accounting treatment of derivatives under IFRS and US GAAP is also required. Level 2 derivatives content connects to portfolio management, fixed income, and equity sections, demonstrating how these instruments integrate into comprehensive investment strategies.

Derivatives are financial instruments whose value is derived from an underlying asset, index, or rate. In CFA Level 2, the derivatives curriculum expands beyond basics to cover more complex concepts.…

Concepts covered: Valuation of Contingent Claims, Pricing and Valuation of Forward Commitments