Introduction

Welcome to Derivative Securities, the unit that covers derivative contracts. These are instruments whose value is derived from an underlying asset like stocks, bonds, commodities, or currencies.

Exam Weight: Part of 17 questions

What You Will Learn

In this unit, you will cover:

• Options: Call and put contracts, the four basic positions, and how options are used for hedging, speculation, and income generation
• Futures: Binding agreements to buy or sell assets at a future date, with margin requirements and daily settlement
• Forward Contracts: Private, customizable alternatives to futures, and why they carry more risk
• Costs, Benefits, and Risks: The tradeoffs of using derivatives, from leverage and flexibility to time decay and counterparty risk

Why This Matters

Derivatives are tools that advisers encounter regularly, whether a client wants to hedge a concentrated stock position with protective puts, generate income through covered calls, or manage commodity exposure through futures. Understanding what these instruments do, how they differ, and when they are appropriate (or not) matters for the Series 66 exam and your career as an investment adviser representative.

Let us start with options, the most commonly tested derivative on the Series 66.