We have provided free notes on CFA Level 1 and Level 2 Derivatives in PDF Format. The PDF Notes was compressed and is mobile compatible. In our earlier article, we have already provided CFA LEVEL 1 BOOKS in PDF format to download for free. Derivatives were originally created in order to reduce risk for Companies and Individuals with exposure to a financial loss.
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How Derivatives Works:
The entire concept of Derivatives should be understood clearly by CFA Students. This is explained by way of a simple example.
For example, say I am a wheat farmer who sells wheat to various counterparties across the U.S. Every year I sell the same quantity and quality of wheat, however after reviewing my books I realize that my profits over the past 5 years have never been the same, and in fact they are fairly volitle.
This isn’t good for my farming business and it makes forecasting next year’s profit very difficult. So what can I do to solve this problem? I can turn to derivatives, namely futures or forwards.
Now I can go to an exchange such as the CME (or simply enter into a forward contract with a counterparty) and lock in a price at which I will sell a specific quantity of wheat at a specified date in the future (hence the word “futures” contract).
So now instead of guessing what my profit will be on next year’s crop, I can determine precisely what I will earn by using derivatives.
And this benefits not only the farmer but also the end businesses which support this farmer, such as the equipment manufacturers.
Since the farmer’s business now has more stable and predicaible cash flows, the farmer is able to better plan for his business and can make investments more freely instead of waiting to see what next year’s profits will be.
Thus, there is a “trickle down” effect in the broader economy by reducing risk in the system.
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