Derivatives Fundamentals Course Dfc Exam Complete Study Guide

Last Updated On: September 2023

The world of finance can be complex and overwhelming, especially when it comes to derivatives. As financial instruments that derive their value from underlying assets, derivatives play a crucial role in modern financial markets. However, mastering the fundamentals of derivatives can be a daunting task, especially for those new to the field.

That’s where the Derivatives Fundamentals Course (DFC) comes in, offering a comprehensive overview of the key concepts, techniques, and strategies involved in derivatives trading.

This article serves as a complete study guide for the DFC exam, providing a comprehensive overview of the essential topics covered in the course. From basic concepts such as forward contracts and options to more advanced topics such as trading strategies and market trends, this guide is designed to help aspiring professionals navigate the complex world of derivatives trading.

Whether you are looking to enhance your knowledge and skills in the field of finance or preparing for the DFC exam, this guide is an invaluable resource that will help you achieve your goals.

Key Takeaways

  • The Derivatives Fundamentals Course (DFC) offers a comprehensive overview of derivatives trading and is necessary to prepare for the DFC exam.
  • Derivatives include forward contracts, futures contracts, and options, and play a crucial role in modern financial markets.
  • Trading strategies in derivatives include the use of options, futures contracts, spread trading, and arbitrage, and risk and return assessment is critical in understanding derivatives as financial instruments.
  • ESG-focused derivatives products are growing in popularity due to increasing awareness and concern for sustainable investing, but investors should conduct thorough due diligence to ensure alignment with their investment objectives.

Basic Concepts in Derivatives

This section covers the basic concepts of derivatives, which are financial instruments that derive their value from an underlying asset or benchmark.

The three main types of derivatives discussed in this course are forward contracts, futures contracts, and options.

Forward contracts are agreements between two parties to buy or sell an asset at a future date at a predetermined price, while futures contracts are similar but traded on exchanges with standardized terms.

Options give the holder the right, but not the obligation, to buy or sell an asset at a predetermined price within a specified time frame.

Forward Contracts

Forward contracts are a type of financial agreement that allow two parties to lock in a price for an asset at a future date, regardless of market fluctuations. This type of contract is common in industries where commodity prices are volatile or where future transactions are anticipated.

In a forward contract, the buyer agrees to purchase the asset at a predetermined price, while the seller agrees to deliver the asset at the same price on the specified date. Both parties are obligated to fulfill the terms of the contract, regardless of how the market performs.

Forward contracts are non-standardized agreements, meaning that they are not traded on an exchange and are tailored to the specific needs of the parties involved. As a result, they are not as liquid as other financial instruments such as futures contracts, which are traded on exchanges and have standardized terms.

However, forward contracts offer more flexibility in terms of customization, allowing the parties to negotiate terms that are better suited to their individual requirements. Despite the lack of standardization, forward contracts are widely used in industries such as agriculture, energy, and finance, and are an important tool for managing risk and uncertainty in these areas.

Futures Contracts

Futures contracts are standardized agreements that are traded on exchanges and allow buyers and sellers to lock in a price for an asset at a future date, providing a way to manage risk and uncertainty in industries such as agriculture, energy, and finance. These contracts are similar to forward contracts, but they differ in several ways.

Firstly, futures contracts are traded on exchanges, which provide a standardized contract size, delivery date, and settlement procedure. Secondly, futures contracts are marked-to-market daily, meaning that the gains and losses are settled on a daily basis. Finally, futures contracts have the potential for unlimited gains and losses, as opposed to forward contracts which have a predetermined profit and loss.

The standardized nature of futures contracts allows for greater liquidity and transparency in the market. This is because there is a greater number of participants trading the same contract, which leads to more efficient price discovery. Additionally, futures contracts can be used for speculative purposes, allowing traders to profit from price movements without taking physical delivery of the underlying asset.

However, this also means that futures contracts can be subject to greater volatility and risk, as traders may take on large positions with high leverage. Despite these risks, futures contracts remain a valuable tool for managing risk and uncertainty in industries where price volatility is a significant factor.


Options contracts are financial instruments that provide the holder with the right, but not the obligation, to buy or sell an underlying asset at a predetermined price within a specified time period. There are two types of options: call options and put options. A call option gives the holder the right to buy the underlying asset at a predetermined price, while a put option gives the holder the right to sell the underlying asset at a predetermined price.

The table below shows an example of a call option and a put option. In this example, the underlying asset is stock in XYZ Company, the strike price is $50, and the expiration date is one year from now. The table shows the payoff for each option at different stock prices. As the stock price increases, the payoff for the call option increases, while the payoff for the put option decreases. As the stock price decreases, the payoff for the put option increases, while the payoff for the call option decreases. Options provide flexibility and can be used for a variety of purposes, including hedging, speculation, and income generation.

Stock Price > $50 Stock Price = $50 Stock Price < $50
Call Option Payoff Stock Price – $50 0 0
Put Option Payoff 0 $50 – Stock Price $50 – Stock Price

Understanding Risk and Return in Derivatives

The assessment of risk and return is critical to understanding the nature and complexities of derivatives as financial instruments. Derivatives, by their very definition, derive their value from underlying assets such as stocks, bonds, commodities, or currencies. Unlike traditional investments, derivatives allow investors to speculate on the future price movements of these underlying assets without actually owning them. This gives investors the opportunity to make significant profits, but also exposes them to significant risks.

To understand the risk and return associated with derivatives, it is important to consider two key factors: volatility and leverage. Volatility refers to the degree of fluctuation in the price of the underlying asset. The greater the volatility, the more risky the derivative. Leverage, on the other hand, refers to the amount of borrowed money used to invest in the derivative.

While leverage can amplify profits, it also amplifies losses. Understanding these factors is crucial in evaluating the potential risk and return of a derivative investment. By carefully assessing these factors, investors can make informed decisions and manage their risk more effectively.

Trading Strategies in Derivatives

Having grasped the concepts of risk and return in derivatives, it is now time to delve into the different trading strategies that can be employed in the derivatives market. Trading strategies in derivatives are complex in nature and require in-depth knowledge of the market, financial instruments, and risk management techniques. These strategies are designed to take advantage of market fluctuations and optimize returns while minimizing risks.

One popular trading strategy is the use of options. Options provide the buyer with the right, but not the obligation, to buy or sell an underlying asset at a fixed price at a specific time. This flexibility allows traders to speculate on the direction of the market while limiting their downside risks.

Another strategy is the use of futures contracts, which are agreements to buy or sell an underlying asset at a predetermined price and time in the future. Futures can be used to hedge against price fluctuations or to speculate on the direction of the market.

Other strategies include spread trading, where traders take advantage of price differentials between two or more financial instruments, and arbitrage, which involves exploiting price discrepancies between different markets.

Overall, understanding the different trading strategies in derivatives is crucial for investors looking to maximize returns while minimizing risks.

Derivatives Instruments

This subtopic discusses three types of derivatives instruments:

  • Interest rate swaps involve exchanging fixed and floating interest rate payments between two parties.
  • Credit default swaps allow investors to protect themselves against the risk of default on a particular debt instrument.
  • Currency swaps involve exchanging cash flows in different currencies between two parties.

An understanding of these derivative instruments is important for investors and financial professionals in managing risk and optimizing investment strategies.

Interest Rate Swaps

Interest rate swaps are a commonly used financial tool for managing interest rate risk. In an interest rate swap, two parties agree to exchange cash flows based on different interest rate benchmarks. These cash flows are typically based on a notional amount, meaning that no actual principal changes hands. One party agrees to pay a fixed rate of interest on the notional amount, while the other party agrees to pay a floating rate of interest based on a specified benchmark, such as LIBOR.

The purpose of the swap is to allow each party to hedge against interest rate risk in their own portfolio. For example, a company with a floating rate loan may be exposed to interest rate risk if rates rise, so they may enter into a swap to exchange their floating rate for a fixed rate to reduce this risk.

Interest rate swaps are flexible instruments that can be customized to meet the needs of each party involved. For example, the notional amount can be adjusted based on the size of the underlying portfolio, and the length of the swap can be tailored to match the term of the underlying asset or liability. Additionally, interest rate swaps are traded in a liquid market, which allows parties to enter and exit positions easily.

However, interest rate swaps also carry some risks, such as counterparty risk and basis risk, which must be carefully managed by both parties involved. Overall, interest rate swaps are an important tool for managing interest rate risk in a portfolio, and they are widely used by corporations, financial institutions, and investors.

Credit Default Swaps

Credit default swaps are a type of financial instrument that allow investors to hedge against the risk of default on a particular debt instrument, such as a corporate bond or loan. Essentially, a credit default swap is a contract between a buyer and seller, where the seller agrees to compensate the buyer in the event of a default by the underlying borrower. In return, the buyer pays the seller a periodic premium, similar to an insurance policy.

To provide a deeper understanding of credit default swaps, the following are some key points to consider:

  • Credit default swaps are often used by investors to mitigate risk and protect against potential losses on their investments.

  • The value of a credit default swap is based on the creditworthiness of the underlying borrower and the likelihood of a default occurring.

  • Credit default swaps can be used to speculate on the creditworthiness of a borrower, as well as to hedge against potential losses on existing investments.

  • While credit default swaps can offer benefits to investors, they can also be complex and carry significant risks, including the potential for large losses if the underlying borrower defaults.

Currency Swaps

Moving on from the previous subtopic of Credit Default Swaps, we will now delve into the concept of Currency Swaps.

Currency swaps are financial instruments that allow two parties to exchange cash flows in different currencies. This is done with the aim of reducing currency risk and achieving better financing terms.

The two parties involved in a currency swap agreement exchange principal and interest payments in different currencies. The exchange rate used for the swap is agreed upon at the outset of the agreement.

Currency swaps are used by corporations, financial institutions, and governments to hedge foreign exchange risk. For example, a company may want to borrow money in a foreign currency to take advantage of lower interest rates, but is concerned about the risk of currency fluctuations.

In this case, they can enter into a currency swap agreement to exchange their domestic currency for the foreign currency at a fixed exchange rate, thereby eliminating the risk of currency fluctuations. Currency swaps are a useful tool for managing currency risk and can help reduce the cost of borrowing in foreign currencies.

Derivatives Market Regulation

The regulation of the derivatives market is a complex and constantly evolving area of financial law that seeks to balance the need for market efficiency and innovation with the necessity of protecting investors and maintaining financial stability. There are several key reasons why regulating the derivatives market is so important.

Firstly, derivatives are often used for speculative purposes, which can lead to excessive risk-taking and market volatility. This can have serious consequences for both individual investors and the wider financial system.

Secondly, the derivatives market is highly interconnected with other financial markets, which means that problems in one area of the market can quickly spread to other areas.

Finally, derivatives can be very complex financial instruments, which means that they can be difficult for investors to understand and evaluate. This can make it easier for unscrupulous market participants to take advantage of less knowledgeable investors.

By regulating the derivatives market, regulators can help to reduce these risks and protect investors and the wider financial system.

In order to achieve these objectives, regulators use a range of tools and techniques. These include requiring the disclosure of information about derivatives, setting minimum standards for market participants, monitoring market activity to detect potential problems, and imposing penalties for non-compliance with regulatory requirements.

In recent years, there has been a trend towards greater international coordination of derivatives market regulation, as regulators seek to harmonize their approaches and reduce the risk of regulatory arbitrage.

Despite these efforts, however, the regulation of the derivatives market remains a challenging and complex task, and regulators must remain vigilant in their efforts to maintain market stability and protect investors.

Derivatives Market Trends

Recent developments in the derivatives market have shown a growing interest in environmental, social, and governance (ESG) factors, with investors increasingly seeking out ESG-focused derivatives products. This trend can be attributed to the increasing awareness and concern for sustainable investing, as well as the growing acknowledgement of the potential impacts of ESG factors on financial performance. In fact, according to a report by the International Swaps and Derivatives Association (ISDA), ESG derivatives trading volumes have grown significantly in recent years, with a 45% increase in volumes in 2020 compared to the previous year.

To illustrate the growth of ESG derivatives products, below is a table showing some examples of ESG derivatives that are currently available in the market:

Product Description Underlying Asset
ESG Index Futures Futures contracts based on ESG indices Stock indices
ESG Options Options contracts based on ESG criteria Single stocks, indices
Green Bonds Futures Futures contracts based on green bonds Green bonds
Carbon Futures Futures contracts based on carbon credits Carbon credits
ESG Swaps Over-the-counter (OTC) swaps based on ESG criteria Single stocks, indices

As the demand for ESG-focused derivatives products continues to grow, it is expected that more innovative products will be developed to cater to the evolving needs of investors. However, it is important for investors to conduct thorough due diligence to ensure that the ESG criteria used in these products are robust and aligned with their investment objectives.

DFC Exam Preparation

Preparing for the DFC exam requires a comprehensive understanding of financial planning concepts and principles. It is vital to have a clear understanding of the financial market and the various financial instruments before appearing for the exam. The DFC exam aims to test the candidate’s knowledge of derivatives and their practical applications in the financial market.

To prepare for the DFC exam, one must start by studying the exam syllabus thoroughly. It is also essential to practice solving sample papers and taking mock tests to gauge one’s preparation level. Additionally, attending training sessions, webinars, and interactive workshops can also help acquire a better understanding of the subject.

Furthermore, it is important to stay updated with the latest market trends and developments in the derivatives market. By following these steps, one can prepare well for the DFC exam and increase their chances of passing.

  • Study the exam syllabus thoroughly
  • Practice solving sample papers and taking mock tests
  • Attend training sessions, webinars, and interactive workshops

Frequently Asked Questions

What is the passing score for the DFC exam?

The passing score for the DFC exam is not explicitly stated by the test provider. However, it is generally understood that candidates must achieve a minimum score of 70% to pass the exam and receive a certificate of completion.

The exam consists of 60 multiple-choice questions that cover various aspects of derivatives, including pricing, valuation, risk management, and trading strategies. Candidates are given 90 minutes to complete the exam, and they must answer at least 42 questions correctly to pass.

The DFC exam is designed to assess the candidate’s understanding of fundamental concepts and principles related to derivatives, and passing the exam is an important milestone for those who wish to pursue a career in derivatives trading or risk management.

How long does it take to complete the DFC course?

The duration of the Derivatives Fundamentals Course (DFC) may vary depending on the institution offering the program, as well as the mode of study. However, on average, the DFC course takes approximately 12 weeks to complete.

This duration may be shorter or longer depending on the intensity of the course, the number of hours of study per week, and the student’s pace. The DFC course is designed to provide students with a comprehensive understanding of derivatives markets and instruments, including futures, options, and swaps.

The course covers various aspects of derivatives trading, including pricing, hedging, and risk management. Upon completion of the DFC program, students should have acquired the necessary knowledge and skills to pursue a career in derivatives trading.

Are there any prerequisites for taking the DFC course or exam?

There are no prerequisites for taking the Derivatives Fundamentals Course (DFC) or its associated exam.

However, it is recommended that individuals taking the course have a basic understanding of financial markets and products.

The DFC is a beginner-level course that provides an introduction to derivatives and their use in financial markets.

It covers the basics of derivatives trading, including futures, options, and swaps.

As such, individuals who are new to finance may find the course challenging, but it is designed to be accessible to all learners regardless of their prior knowledge or experience in the field.

Can the DFC certification be used in international markets?

The DFC certification is recognized internationally and can be used in various markets worldwide.

The certification is a testament to an individual’s understanding of the fundamentals of derivatives and their ability to apply that knowledge in practical situations.

While the certification may not be a requirement for all roles in the derivatives industry, possessing it can certainly enhance one’s credibility and marketability in the field.

It is important to note, however, that regulations and requirements for derivatives trading may vary between countries, and it is crucial for individuals to stay up-to-date on the specific regulations in the markets they operate in.

What career opportunities are available for those who pass the DFC exam?

The career opportunities for individuals who pass the Derivatives Fundamentals Course (DFC) exam may vary depending on their qualifications, experience, and interests, as well as the demand and supply of derivatives-related jobs in different sectors and regions. However, in general, the DFC certification may enhance one’s knowledge, skills, and credibility in the field of derivatives, which could be useful for pursuing various roles such as risk managers, traders, analysts, consultants, regulators, or educators.

Some employers may require or prefer candidates who have passed the DFC exam or similar certifications as a way to demonstrate their proficiency in derivatives and their commitment to professional development. Moreover, the DFC certification may provide a foundation for further education and certification in more advanced or specialized areas of derivatives, such as options, futures, swaps, or structured products.

Ultimately, the career opportunities for those who pass the DFC exam depend on many factors beyond the exam itself, such as the global economy, the regulatory environment, and the technological innovation that affect financial markets and their participants.


The Derivatives Fundamentals Course (DFC) Exam is a comprehensive test that covers various aspects of derivatives. It requires candidates to have a deep understanding of derivatives concepts, risk and return, trading strategies, instruments, market regulation, and trends. The exam is designed to test the knowledge and skills of individuals who wish to work in the derivatives market.

To prepare for the DFC exam, candidates need to study the fundamental concepts in derivatives, understand the role of risk and return in derivatives trading, learn about different trading strategies, and become familiar with the various derivatives instruments.

Additionally, candidates should also be aware of the regulations governing the derivatives market and keep up-to-date with the latest market trends. By mastering these topics, candidates can increase their chances of passing the DFC exam with flying colors.

In conclusion, passing the DFC exam requires a solid understanding of derivatives fundamentals, trading strategies, instruments, regulation, and market trends. Candidates who are well-prepared and have a deep understanding of these topics are more likely to succeed in the exam.

Studying diligently and staying informed about current market trends will help candidates develop the knowledge and skills needed to excel in the derivatives market.

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