Derivative Benefits, Risks, and Issuer and Investor Uses

Free CFA Level I lesson in Derivatives. 13 min read, ~1,962 words.

Benefits: risk transfer, price discovery, cost efficiency, leverage, and access to otherwise unavailable exposures. Risks: leverage amplification, counterparty default (OTC), liquidity gaps, operational/model risk, regulatory complexity. Counterparty risk is an OTC trait; exchange-traded derivatives clear through a central counterparty (clearinghouse). Basis risk persists whenever the hedge instrument is an imperfect...

What this lesson covers

• Content
• Example 1
• Example 2
• Common Mistakes
• Check Your Understanding
• Exam Shortcuts

Learning objectives

• benefits risks and uses

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