Derivative Characteristics
Exam Weight: ~1 question (2% of exam)
The previous unit covered what derivatives are and how they are structured. This unit covers the costs, benefits, and risks of using them. Understanding these characteristics is essential for evaluating whether derivatives are suitable for client portfolios.
Why do you need to know this? Derivatives carry considerable complexity and risk. As an investment adviser, you need to understand the cost/benefit/risk profile of each derivative type, time decay mechanics, leverage effects, suitability considerations, and regulatory requirements for options accounts.