CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features
An investor wants exposure to a stock index's price movements with a small initial investment. Which feature of derivatives most likely makes this possible?
Leverage makes this possible. A derivative lets an investor gain large exposure to an underlying's price changes with only a small initial payment or margin, so gains and losses are magnified relative to the amount invested.
- ALeverageCorrect
- BStandardization
- CPhysical delivery
Explanation
Derivatives allow large exposure to an underlying for a small upfront payment or margin, which is leverage. Standardization concerns contract terms and physical delivery concerns settlement, neither of which explains the low outlay.
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