CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A fund manager wants to shift a large equity portfolio's exposure to a different market quickly. Compared with trading the underlying securities directly, using derivatives most likely offers which advantage?
Derivatives most likely offer lower transaction costs and faster execution when changing portfolio exposure, because derivative markets are often more liquid and cheaper to trade than the underlying securities. They do not eliminate counterparty risk in all cases, and derivative holders do not automatically receive underlying dividends.
- ALower transaction costs and faster executionCorrect
- BElimination of counterparty credit risk in all cases
- CAutomatic receipt of dividends from the underlying securities
Explanation
Derivatives typically have lower transaction costs and greater liquidity than trading the underlying assets, allowing rapid changes in exposure. Counterparty risk is not eliminated for over-the-counter contracts. Holders of derivatives do not generally receive dividends from the underlying.
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