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CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses

A pension fund wants to create an exposure to an asset class that is costly to access directly because of high trading frictions and restrictions. Which benefit of derivatives does this most likely illustrate?

This most likely illustrates derivatives completing markets: they give investors access to exposures and risk profiles that are costly or hard to obtain through the underlying. Derivatives still require risk management and offer no guarantee of outperformance, so the other statements are incorrect.

  1. ADerivatives completing markets by offering exposures hard to obtain otherwiseCorrect
  2. BDerivatives removing the need for any risk management
  3. CDerivatives guaranteeing that the exposure outperforms the asset class

Explanation

Derivatives help complete markets by providing access to risks and exposures that are difficult or costly to obtain directly. They do not remove the need for risk management, since they add their own risks. They carry no performance guarantee.

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