What CFA Level 1 Derivatives actually tests
Derivatives is 5-8% of the Level 1 exam:
| Area | What it covers |
|---|---|
| Derivative Markets | Purposes, exchange-traded vs. OTC, clearing, settlement |
| Forward Contracts | Pricing, valuation, FRAs, currency forwards, equity forwards |
| Futures | Marking to market, margin, basis, cost of carry, contango, backwardation |
| Options | Calls, puts, moneyness, exercise styles, payoffs, put-call parity, binomial model |
| Swaps | Interest rate, currency, equity swaps |
| Risk Management | Hedging with futures and options, delta hedging concept |
Why put-call parity is worth memorizing cold
Put-call parity isn't just a formula to plug into — it's a no-arbitrage relationship, and CFA questions frequently test it in the "solve for the missing piece" direction: given three of the four values (call, put, stock, risk-free bond), find the fourth. Knowing the relationship well enough to rearrange it under time pressure is worth more than memorizing one fixed form of it.
Sample question: Put-Call Parity
Derivatives · Medium difficulty
A stock trades at $100. A 1-year European call option with a $100 strike costs $8. The risk-free rate is 5% (annual, simple interest). According to put-call parity, what should a 1-year European put with the same strike and expiry cost?
A. $2.62
B. $3.24
C. $4.76
D. $8.00
The correct answer is B — $3.24.
Put-call parity: C + PV(X) = P + S₀, so P = C − S₀ + PV(X) = 8 − 100 + (100 / 1.05) = 8 − 100 + 95.24 = $3.24. The put is cheaper than the call here because the stock price ($100) is above the present value of the strike ($95.24) — the call is more likely to finish in the money, so it carries more of the option premium.
Put-call parity: C + PV(X) = P + S₀, so P = C − S₀ + PV(X) = 8 − 100 + (100 / 1.05) = 8 − 100 + 95.24 = $3.24. The put is cheaper than the call here because the stock price ($100) is above the present value of the strike ($95.24) — the call is more likely to finish in the money, so it carries more of the option premium.