CFAI lurves derivatives

Reading level III texts, I felt that the CFAI quite often points to derivatives as the solution to every problem, without properly considering their risks. First of all, like every zero-sum game, only one party can be right. Secondly, liquidity of derivatives may be no more than that of the underlying, and can dry up just as suddenly. Thirdly, there are almost continuous transaction costs - explicit or implicit - as you adjust the hedges. And most importantly, for OTC transactions, your counterparty can screw you over.

It’s not that CFAI hides these risks, but they underemphasize them. It’s just assumed that, for exampe, if the 30-year corporates are scarce, derivatives will fill the gap. Or that it’s less expensive to adjust beta or duration using derivatives rather than cash instruments. I find it hard to believe that ETFs based on an index will be any less liquid than futures on that index, or more expensive to trade. Note that gains on both are taxable when traded so it’s not like derivatives give you a tax alpha.

I wonder how much of this academic material is influenced by the attractiveness of derivatives trading for the exchanges and investment banks, compared to the modest profits they can get from cash trading.


it’s a special overflowing love, when “love” just doesn’t quite express the amount of luuuuuuurve one has.


they do like derivatives. but remember this is their exam. we chose to take it and we have to play by their rules. that’s how it is. when we study and write this exam we must think like them to pass. we choose to play their game, only thing to do is beat them by passing

they can put whatever they want on the exam really. or in the curriculum. we must accept it and try to beat the CFA

I lurve derivatives too. Properly managed they can derisk almost any position and can enhance returns. But need to be cognizant of the leverage involved. CFAI just wants us to be able to understand how they can be used to change parameters of a loan. I dont think the curriculum gets into speculating with derivatives.

My 2 cents:

There’s learning to drive and there’s learning to get a driver’s license.

Two completely different things.

So yes, we can go back and forth endlessly, comparing the curriculum to “real life”, but ultimately, the goal at this point is to pass the exams, not to figure out how exactly it’s done in real life.

I understand they are different, and “teaching to the test” and all that; but ultimately your driver’s license should inspire some confidence that you actually know how to drive. Esepcially when it is touted as an “investment skills enhancer.” “Different” is not the same as “uncoupled”.