Exam Weight: ~2 questions (1.5% of exam)
A derivative is a financial instrument whose value is derived from an underlying asset. Options, warrants, futures, and forwards are all derivatives. This unit covers the types of derivatives, how they are structured, and how they are used. The next unit covers the costs, benefits, and risks of using them.
Why do you need to know this? Derivatives allow clients to hedge risks or enhance returns, but they carry significant complexity and risk. Understanding their structure and mechanics helps you evaluate whether these instruments are suitable for client portfolios and comply with suitability requirements.