DERIVATIVES
CFA LEVEL I — LAST-DAY CHEAT SHEET
Covers both CFA Institute readings under the Derivatives topic area:
R1. Derivative Instrument and Derivative Market Features
R2. Forward Commitment and Contingent Claim Features and Instruments
Based on Kaplan Schweser curriculum · Mapped to full CFA Institute LOS
Format: Compact exam-day reference — formulas, traps, comparisons, ASCII payoff diagrams
CFA L1 Derivatives Cheat Sheet | Page 1 of 8
, Reading 1: Derivative Instrument & Market Features
LOS covered: define derivative; distinguish forward commitments vs contingent claims; define forward, futures, swap, option; describe derivative market
structure (OTC vs exchange-traded); describe clearinghouse functions.
1.1 What Is a Derivative? ( ⭐ Foundation — always tested indirectly)
Simple explanation: A derivative is a financial contract whose value is "derived" from the value of something else — called the underlying (a stock, bond,
index, currency, commodity, interest rate, or even another derivative). The derivative itself has no independent value — kill the underlying's price movement, and
the derivative is worthless.
Underlying examples: equities, fixed-income securities, currencies, commodities, interest rates, credit, even weather/volatility indices.
🧠 MEMORY TRICK: Think of a derivative as a "shadow contract" — it copies (derives from) the underlying's price moves without you owning the underlying itself.
Why derivatives exist (3 core uses) — ⭐ Exam Favourite (very frequently tested as a standalone MCQ)
Use What it means Who does it
Risk management (Hedging) Reduce/transfer unwanted price risk Corporates, portfolio managers
Price discovery Futures/forward prices reveal market's expectation of future spot prices Whole market benefits
Operational advantages Lower transaction costs, greater liquidity, easier to short, less capital required (leverage) Speculators, arbitrageurs
⭐ EXAM FAVOURITE: A question describing "using derivatives to speculate with less capital than buying the underlying" is testing the leverage / operational advantage
use — not hedging. Read the scenario carefully: hedger = reducing existing risk; speculator = taking on new risk to profit from a view.
Criticisms of derivatives (used in "disadvantages" MCQs)
• Perceived as a way to "take very large risks" (high leverage → high losses possible)
• Complexity → mispricing / systemic risk (e.g., 2008 GFC blamed partly on derivatives)
• Can be used to circumvent regulations/taxes/accounting rules
1.2 Forward Commitments vs Contingent Claims — ⭐⭐ (This classification is tested every exam)
Feature Forward Commitment Contingent Claim
Obligation? Both parties MUST perform at expiration Only one party (option buyer) has a right, not obligation
Instruments Forwards, Futures, Swaps Options (calls, puts), Credit derivatives, some others
Payoff shape Linear / symmetric (both up & down side) Non-linear / asymmetric (capped downside for buyer)
Upfront cost Usually zero value at initiation (forwards/swaps) Premium must be paid upfront
🧠⚠️ MEMORY TRICK: "CO-mmitment = CO-mpulsory for both." "CONTINGENT = depends on a CHOICE" (the option holder chooses whether to exercise).
COMMON MISTAKE: Students confuse futures with options because both trade on exchanges. Remember: futures are forward commitments (obligatory), only
options are contingent claims.
1.3 Forward Contracts
Simple explanation: A private (OTC), customized agreement between two parties to buy/sell an asset at a fixed price on a future date. No money changes
hands today (in a "fair" forward).
• Long forward = agrees to BUY at the forward price later → benefits if spot price rises
• Short forward = agrees to SELL at the forward price later → benefits if spot price falls
⭐⚠️EXAM FAVOURITE: "No cash exchanged at initiation, settled only at expiration" = classic forward feature tested against futures (which requires margin/daily
settlement).
COMMON MISTAKE: Do NOT say a forward has "zero risk." It has zero/near-zero value at initiation, but full price & counterparty (default) risk exists until
settlement.
1.4 Futures Contracts — vs Forwards ( ⭐⭐⭐ Highest-frequency comparison table in this reading)
Feature Forward Futures
Market OTC (private, negotiated) Exchange-traded (standardized)
Customization Fully customizable (size, date, asset) Standardized contract terms
Counterparty risk High — bears full default risk of other party Minimal — clearinghouse becomes counterparty to both sides
Regulation Largely unregulated / lightly regulated Highly regulated
Cash flow None until expiration (typically) Daily mark-to-market (settled daily) + margin
Liquidity Low (hard to exit early) High (easy to offset/close position)
Transparency Private, price not public Publicly observable prices
CFA L1 Derivatives Cheat Sheet | Page 2 of 8
CFA LEVEL I — LAST-DAY CHEAT SHEET
Covers both CFA Institute readings under the Derivatives topic area:
R1. Derivative Instrument and Derivative Market Features
R2. Forward Commitment and Contingent Claim Features and Instruments
Based on Kaplan Schweser curriculum · Mapped to full CFA Institute LOS
Format: Compact exam-day reference — formulas, traps, comparisons, ASCII payoff diagrams
CFA L1 Derivatives Cheat Sheet | Page 1 of 8
, Reading 1: Derivative Instrument & Market Features
LOS covered: define derivative; distinguish forward commitments vs contingent claims; define forward, futures, swap, option; describe derivative market
structure (OTC vs exchange-traded); describe clearinghouse functions.
1.1 What Is a Derivative? ( ⭐ Foundation — always tested indirectly)
Simple explanation: A derivative is a financial contract whose value is "derived" from the value of something else — called the underlying (a stock, bond,
index, currency, commodity, interest rate, or even another derivative). The derivative itself has no independent value — kill the underlying's price movement, and
the derivative is worthless.
Underlying examples: equities, fixed-income securities, currencies, commodities, interest rates, credit, even weather/volatility indices.
🧠 MEMORY TRICK: Think of a derivative as a "shadow contract" — it copies (derives from) the underlying's price moves without you owning the underlying itself.
Why derivatives exist (3 core uses) — ⭐ Exam Favourite (very frequently tested as a standalone MCQ)
Use What it means Who does it
Risk management (Hedging) Reduce/transfer unwanted price risk Corporates, portfolio managers
Price discovery Futures/forward prices reveal market's expectation of future spot prices Whole market benefits
Operational advantages Lower transaction costs, greater liquidity, easier to short, less capital required (leverage) Speculators, arbitrageurs
⭐ EXAM FAVOURITE: A question describing "using derivatives to speculate with less capital than buying the underlying" is testing the leverage / operational advantage
use — not hedging. Read the scenario carefully: hedger = reducing existing risk; speculator = taking on new risk to profit from a view.
Criticisms of derivatives (used in "disadvantages" MCQs)
• Perceived as a way to "take very large risks" (high leverage → high losses possible)
• Complexity → mispricing / systemic risk (e.g., 2008 GFC blamed partly on derivatives)
• Can be used to circumvent regulations/taxes/accounting rules
1.2 Forward Commitments vs Contingent Claims — ⭐⭐ (This classification is tested every exam)
Feature Forward Commitment Contingent Claim
Obligation? Both parties MUST perform at expiration Only one party (option buyer) has a right, not obligation
Instruments Forwards, Futures, Swaps Options (calls, puts), Credit derivatives, some others
Payoff shape Linear / symmetric (both up & down side) Non-linear / asymmetric (capped downside for buyer)
Upfront cost Usually zero value at initiation (forwards/swaps) Premium must be paid upfront
🧠⚠️ MEMORY TRICK: "CO-mmitment = CO-mpulsory for both." "CONTINGENT = depends on a CHOICE" (the option holder chooses whether to exercise).
COMMON MISTAKE: Students confuse futures with options because both trade on exchanges. Remember: futures are forward commitments (obligatory), only
options are contingent claims.
1.3 Forward Contracts
Simple explanation: A private (OTC), customized agreement between two parties to buy/sell an asset at a fixed price on a future date. No money changes
hands today (in a "fair" forward).
• Long forward = agrees to BUY at the forward price later → benefits if spot price rises
• Short forward = agrees to SELL at the forward price later → benefits if spot price falls
⭐⚠️EXAM FAVOURITE: "No cash exchanged at initiation, settled only at expiration" = classic forward feature tested against futures (which requires margin/daily
settlement).
COMMON MISTAKE: Do NOT say a forward has "zero risk." It has zero/near-zero value at initiation, but full price & counterparty (default) risk exists until
settlement.
1.4 Futures Contracts — vs Forwards ( ⭐⭐⭐ Highest-frequency comparison table in this reading)
Feature Forward Futures
Market OTC (private, negotiated) Exchange-traded (standardized)
Customization Fully customizable (size, date, asset) Standardized contract terms
Counterparty risk High — bears full default risk of other party Minimal — clearinghouse becomes counterparty to both sides
Regulation Largely unregulated / lightly regulated Highly regulated
Cash flow None until expiration (typically) Daily mark-to-market (settled daily) + margin
Liquidity Low (hard to exit early) High (easy to offset/close position)
Transparency Private, price not public Publicly observable prices
CFA L1 Derivatives Cheat Sheet | Page 2 of 8
