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CFA Level I · CFA Level I Exam · Derivative Instrument and Derivative Market Features

Compared with a transaction in the underlying asset, a derivative contract most likely has which of the following features?

Derivatives most likely allow an investor to obtain exposure to an underlying with a much smaller initial outlay than buying the asset outright. This gives leverage. The holder generally does not pay the full value upfront and does not receive the underlying's dividends or interest.

  1. AIt requires the full value of the underlying to be paid at initiation
  2. BIt can be used to gain exposure to the underlying with a smaller initial outlayCorrect
  3. CIt always gives the holder a claim to the underlying's dividends or interest

Explanation

Derivatives typically require little or no upfront payment relative to the underlying's value, giving leverage. Full payment at initiation describes a cash purchase, and derivatives holders usually have no claim to the underlying's income.

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