CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A portfolio manager wants to move a large equity allocation toward bonds quickly. Compared with trading the physical securities, using derivatives for this purpose is most likely to offer lower:
Derivatives most likely offer lower transaction costs. Adjusting exposure through futures or swaps is usually cheaper and faster than buying and selling large physical positions. Counterparty risk can actually be higher for OTC contracts, and liquidity in major derivatives is often better than in the underlying.
- Atransaction costsCorrect
- Bexposure to counterparty credit risk
- Cmarket liquidity in the instruments
Explanation
Derivatives generally have lower transaction costs than trading the underlying, which makes quick changes in exposure cheaper. Counterparty credit risk is typically higher for over-the-counter derivatives, and liquidity is often greater, not lower, in the derivative.
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