Derivatives

Derivatives in the CFA Level 3 curriculum represent an advanced examination of these financial instruments that provide exposure to underlying assets. Level 3 builds upon the foundational knowledge from earlier levels and focuses on sophisticated applications within portfolio management and wealth planning. The curriculum explores how derivatives serve strategic functions in portfolios: risk management, yield enhancement, asset allocation adjustments, and creating synthetic positions. Candidates learn to analyze derivatives from the perspective of institutional and individual investors. Key derivative instruments covered include futures, forwards, options, swaps, and more complex structured products. The focus shifts from valuation mechanics to implementation strategies and understanding how these tools can address specific client objectives. For risk management, derivatives can hedge exposures to various factors including market risk, interest rate risk, currency risk, and credit risk. The curriculum examines how to match derivative characteristics with portfolio needs. Yield enhancement strategies using covered calls and cash-secured puts are analyzed alongside their risk-return implications. Portfolio managers can use derivatives for efficient exposure management—adjusting beta, duration, or sector weightings more cost-effectively than trading underlying securities. The curriculum also addresses practical considerations: liquidity constraints, counterparty risk, regulatory limitations, and implementation costs that impact derivatives strategy selection. Level 3 candidates must demonstrate their ability to integrate derivatives within comprehensive portfolio management frameworks, considering client constraints, market conditions, and investment objectives. This includes understanding when derivatives provide advantages over physical asset positions and how they fit within fiduciary responsibilities. Ultimately, derivatives in Level 3 are presented as sophisticated tools requiring careful analysis of both benefits and limitations when deployed in client portfolios.

Derivatives in the CFA Level 3 curriculum represent an advanced examination of these financial instruments that provide exposure to underlying assets. Level 3 builds upon the foundational knowledge f…

Concepts covered: Swaps, Forwards, and Futures Strategies, Options Strategies