Updated for the 2026-2027 CFA® Level I curriculum.
Issuers and investors both use derivatives, but they use them for different reasons. Issuers use derivatives to manage exposures created by their operations and financing decisions. Investors use derivatives to manage the exposure of a portfolio they already hold. Level I tests whether you can tell these two purposes apart in a scenario, not whether you can recite a list of derivative types.
Quick Answer
Issuers use derivatives mainly to hedge exposures tied to their business, such as interest rate, currency, or commodity price risk on debt, receivables, or input costs. Investors use derivatives to adjust portfolio exposure, hedge existing positions, or take tactical views without trading the underlying asset directly. The core exam skill is matching the participant's objective to the correct use of derivatives, not memorizing every possible application.
Key Takeaways About Derivative Uses by Issuers and Investors
Issuers use derivatives to manage exposures created by financing, operations, or contractual cash flows.
Investors use derivatives to manage the risk and return of assets they already hold or plan to hold.
A derivative can change market exposure without any trade in the underlying asset.
The same derivative type can serve a hedging purpose for one participant and a speculative or tactical purpose for another.
Objective, not contract type, determines whether a derivative use counts as hedging or speculation.
Common issuer exposures include interest rate risk on debt, currency risk on foreign sales, and commodity risk on input costs.
Common investor exposures include portfolio beta, currency translation risk, and rebalancing needs.
What You Need to Know for CFA Level I
Explain how issuers use derivatives to hedge interest-rate, currency, commodity, or other operating exposures.
Explain how investors use derivatives to hedge or adjust portfolio exposure.
Recognize that derivatives let a participant change market exposure without trading the underlying directly.
Identify income or tactical uses of derivatives at a general level, without needing pricing detail.
Compare issuer and investor objectives when given a scenario, and identify which participant is described.
Why Issuers Use Derivatives
An issuer is an entity that issues debt or equity, such as a corporation or government. Issuers face exposures created by their financing and operating decisions. Derivatives let issuers manage those exposures directly.
Common issuer exposures include:
Interest rate risk. A company with floating-rate debt faces higher interest expense if rates rise. An interest rate swap can convert floating payments to fixed.
Currency risk. A company that sells goods abroad receives foreign currency. A forward contract can lock in the domestic currency value of that future cash flow.
Commodity risk. A manufacturer that buys a raw material faces cost increases if the commodity price rises. A futures contract can lock in a purchase price.
Issuer exposures come from the business itself. The derivative use is defensive. It protects a cash flow or cost that already exists because of how the issuer operates or finances itself.
Why Investors Use Derivatives
An investor holds or plans to hold financial assets and cares about portfolio-level risk and return. Investors use derivatives to manage exposure across a portfolio rather than a single operating cash flow.
Common investor uses include:
Hedging portfolio exposure. A manager holding a bond portfolio can use interest rate futures to reduce duration risk without selling bonds.
Adjusting exposure without trading the underlying. A manager can increase or decrease equity market exposure using index futures instead of buying or selling individual stocks.
Tactical positioning. A manager can use options to express a short-term view on volatility or price direction.
Income generation. A manager can write covered calls against a stock position to collect premium income.
Investor exposures come from asset holdings, not from operating the business itself. The derivative use is about managing the portfolio's risk and return profile.
Issuer Uses vs Investor Uses
Factor | Issuer | Investor |
|---|---|---|
Objective | Protect an operating or financing cash flow | Manage portfolio risk and return |
Typical exposure | Interest rate, currency, or commodity cost tied to the business | Market, interest rate, or currency exposure tied to holdings |
Derivative role | Locks in a rate, price, or cost | Adjusts exposure, hedges a position, or expresses a view |
Key risk consideration | Basis risk between the hedge and the actual exposure | Liquidity, cost of the hedge, and tracking error versus the target exposure |
Risk Management and Exposure Management
Both issuers and investors use derivatives to change exposure, not to remove it. A derivative shifts risk from one party to another. It does not make risk disappear.
A key exam point: hedging and speculation are defined by purpose, not by the type of contract. A forward contract used to lock in a known future cash flow is hedging. The same forward contract used to bet on a currency move with no underlying exposure is speculation. The contract is identical. The objective is not.
Another key point: a derivative can change exposure without any change in the underlying holding. A portfolio manager can reduce equity exposure using futures while the stocks in the portfolio stay untouched. This is efficient, but it also means the manager still owns the original assets and any risk not covered by the derivative.
Examples by Derivative Type
Forwards and futures. Issuers use these to lock in a future price or rate. Investors use them to adjust exposure quickly and at lower cost than trading the underlying.
Swaps. Issuers commonly use interest rate swaps to convert floating debt to fixed, or vice versa. Investors use swaps to adjust portfolio duration or gain exposure to an asset class without direct ownership.
Options. Issuers use options less often for core hedging, though some use them for specific cost protection. Investors use options to hedge downside risk, generate income, or take a defined-risk directional view.
Worked Example
Scenario 1: Issuer hedge
A US exporter expects to receive €10,000,000 (EUR) in 90 days from a foreign customer. The current 90-day forward rate is $1.08 (USD) per €1. The exporter sells €10,000,000 forward at this rate.
Locked-in amount (USD)
The exporter now knows the exact USD value of the receivable regardless of how the spot exchange rate moves over the next 90 days. This is a hedge of an operating cash flow. The exposure comes from the sale contract, not from a financial asset held for investment.
Scenario 2: Investor exposure adjustment
A portfolio manager holds a $50,000,000 equity portfolio with a beta of 1.0. The manager wants to reduce market exposure by 20% ahead of an earnings season without selling any stock. An equity index future has a notional value of $200,000 per contract.
Target exposure reduction
Contracts to sell
The manager sells 50 index futures contracts. The portfolio's stock holdings do not change, but the effective market exposure falls by $10,000,000. This is an exposure adjustment, not a hedge of a specific cash flow, and it can be reversed quickly by closing the futures position.
Common Exam Traps
Assuming issuers and investors always use the same derivative for the same reason
A currency forward can hedge an exporter's receivable or express a currency view for an investor. The contract type does not tell you the purpose. The scenario does.
Equating hedging with speculation based only on the contract type
Options, swaps, and futures can all be used for hedging or speculation. Read the scenario for an existing exposure before labeling the trade.
Ignoring that a derivative can change exposure without changing the underlying holding
Candidates sometimes assume a manager must buy or sell the actual asset to change exposure. Futures and swaps often do this more efficiently.
Overstating the purpose beyond what the scenario supports
If a question describes a swap used to convert floating debt to fixed, do not assume the issuer is also speculating on rates. Stick to the stated objective.
Practice Questions
A commodity-importing company has a large floating-rate loan and also faces rising input costs tied to a key raw material. The company enters into an interest rate swap to receive floating and pay fixed, and separately enters into a commodity futures contract to lock in the purchase price of the raw material.
Which statement best describes the company's use of derivatives?
The company is speculating on interest rates and hedging commodity price risk.
The company is hedging both an interest rate exposure and a commodity price exposure tied to its operations.
The company is using derivatives to adjust portfolio exposure the way an investor would.
Correct Answer: B
The company has a real, existing exposure in both cases. The floating-rate loan creates interest rate risk, and the swap converts that floating exposure to fixed, protecting the company from rising rates. The need to purchase raw materials creates commodity price risk, and the futures contract locks in a purchase price. Both derivative uses are defensive responses to exposures created by the company's financing and operations. This is issuer-style hedging.
Option A: Incorrect. Paying fixed and receiving floating on a swap against a floating-rate loan is a hedge, not a speculative position. There is no indication the company lacks the underlying exposure.
Option C: Incorrect. The company is not managing a financial asset portfolio. Its exposures come from operating and financing activities, which is characteristic of an issuer, not an investor.
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FAQs About Derivative Uses by Issuers and Investors
Are issuers only hedgers and investors only speculators?
No. Both issuers and investors can hedge or speculate. Issuers typically hedge exposures tied to operations and financing. Investors can hedge a portfolio position or take a tactical view, depending on the goal stated in the scenario.
Can an investor use the same derivative an issuer uses?
Yes. The same forward, future, swap, or option can serve either participant. The purpose behind the trade, not the contract type, determines how it should be classified on the exam.
Does hedging with derivatives remove all risk?
No. A derivative shifts exposure from one party to another. It does not eliminate risk such as basis risk, counterparty risk, or risk not covered by the hedge.