NISM CFA Level 1, Derivatives. Updated Jun 2026, 12-minute read.
CFA Level 1 Derivatives — Forwards, Futures, Options and Swaps
Derivatives is 5–8% of CFA Level 1 (~11 questions). The Level 1 curriculum introduces derivative instruments conceptually — pricing forward contracts, option payoffs, put-call parity, and swap mechanics. It is the bridge between NISM Series VIII content and global CFA-level derivatives theory.
Key takeaways
- Forward contract: agreement to buy/sell an asset at a future date at a price set today (forward price)
- Forward price: F₀ = S₀ × (1 + r)^T (for no-dividend-paying assets in continuous or discrete compounding)
- Futures vs Forwards: Futures are exchange-traded, standardised, marked-to-market daily; Forwards are OTC, customisable, settled at maturity
- Call option payoff: max(ST − X, 0) where ST = price at expiry, X = strike
- Put option payoff: max(X − ST, 0)
- Put-call parity (European): C − P = S₀ − PV(X)
- Swap = series of forward contracts — plain vanilla interest rate swap exchanges fixed for floating
Forward Contracts
A forward contract obligates the buyer to purchase (and seller to deliver) an underlying asset at a specific future date at the forward price agreed today. No money changes hands upfront.
Forward Pricing
For a no-dividend-paying stock:
F₀ = S₀ × (1 + r)^T (discrete compounding)
F₀ = S₀ × e^(rT) (continuous compounding)
where S₀ = current spot price, r = risk-free rate, T = time to maturity.
For dividend-paying stock or bonds: subtract PV of expected dividends from S₀.
F₀ = (S₀ − PV of dividends) × (1 + r)^T
Value of a Forward Contract After Inception
Value to long at time t: Vt(long) = St − F₀/(1+r)^(T-t)
At inception, value = 0 (neither party pays premium).
Futures vs Forwards
| Feature | Futures | Forwards |
|---|---|---|
| Market | Exchange-traded (NSE, CME) | OTC (bank-to-client) |
| Standardisation | Standardised contract size/expiry | Customisable |
| Settlement | Daily MTM (mark-to-market) | At maturity |
| Counterparty Risk | Clearing house eliminates credit risk | Direct counterparty risk |
| Margin | Initial margin + variation margin required | No margin (credit-based) |
| Liquidity | Highly liquid (can offset) | Illiquid (hard to exit early) |
Options
Basic Payoffs
- Long Call: Payoff = max(ST − X, 0). Profit = max(ST − X, 0) − Call Premium
- Short Call: Payoff = −max(ST − X, 0). Profit = Call Premium − max(ST − X, 0)
- Long Put: Payoff = max(X − ST, 0). Profit = max(X − ST, 0) − Put Premium
- Short Put: Payoff = −max(X − ST, 0). Profit = Put Premium − max(X − ST, 0)
Moneyness
- Call option: In-the-money when ST > X; At-the-money when ST = X; Out-of-the-money when ST < X
- Put option: In-the-money when ST < X; At-the-money when ST = X; Out-of-the-money when ST > X
Put-Call Parity
For European options on a non-dividend-paying stock:
C + PV(X) = P + S₀
Or equivalently: C − P = S₀ − PV(X)
Where PV(X) = X / (1+r)^T = present value of strike price.
Use: If you know 3 of the 4 variables, you can solve for the 4th. Also used to spot arbitrage opportunities.
Replication: Long call + Long risk-free bond = Long put + Long stock (protective put = fiduciary call)
Swaps
Interest Rate Swap
Plain vanilla interest rate swap: Party A pays fixed rate; Party B pays floating rate (e.g., LIBOR/SOFR) on the same notional principal.
No exchange of notional. Net settlement — only the difference is exchanged at each payment date.
Why use it: Company with floating-rate debt can swap to fixed (locks in rate). Company with fixed-rate debt can swap to floating (if rates expected to fall).
Swap as series of forwards
A swap can be thought of as a strip of forward contracts, each with a different expiry. This is why swap pricing uses the forward rate curve.
CFA Level 1 vs NISM VIII — Derivatives Overlap
| Topic | NISM VIII Coverage | CFA Level 1 Adds |
|---|---|---|
| Futures Pricing | Cost of carry model, basis | General no-arbitrage pricing, continuous compounding |
| Options | Call/put payoffs, Greeks, strategies | Put-call parity, Binomial option pricing intro |
| Swaps | Brief mention | Full mechanics, pricing, and interest rate applications |
| Regulation | Deep SEBI/NSE framework | Global OTC regulation overview (Dodd-Frank, EMIR) |
Frequently asked questions
Is CFA Level 1 derivatives harder than NISM Series VIII?
Different in scope, not necessarily harder. NISM Series VIII goes deep on Indian regulatory framework, margining systems, and NSE-specific operations. CFA Level 1 derivatives covers global instruments (swaps, global regulatory framework) and pricing theory (put-call parity, forward valuation). CFA's derivatives questions are conceptual; NISM's are more operationally specific. If you've cleared NISM VIII, CFA Level 1 derivatives theory builds naturally on that foundation.
What is put-call parity in simple terms?
Put-call parity shows that holding a call option plus a risk-free bond is exactly equivalent to holding a put option plus the underlying stock. Both portfolios have the same payoff at expiry. If they have the same payoff, they must have the same current price — if they don't, arbitrage is possible. Exam use: if given C, S₀, and r, you can calculate what P must be (and vice versa).
Written by Arpan Das.
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