Free CAIA Level II Volatility and Complex Strategies Practice Questions

C is correct. Theta measures time decay — the dollar amount by which an option's value decreases for each day (or unit of time) that passes, holding all other factors constant. It is typically negative for long options and positive for short option positions (the seller benefits from the passage of time).
Choice A is incorrect because sensitivity to a one-point change in implied volatility is the definition of vega, not theta.
Choice B is incorrect because the change in delta for a one-unit move in the underlying describes gamma, the second-order price sensitivity Greek.
Choice D is incorrect because sensitivity to the risk-free rate is measured by rho, a minor Greek that affects call and put values through the discounting of the strike price.

A is correct. A quanto (quantity-adjusted) futures contract embeds a fixed exchange rate into the settlement mechanism. The payoff equals the change in the foreign asset's price multiplied by a fixed notional exchange rate, paid in the home currency. This allows the investor to capture the local-currency price return of the foreign asset without bearing exchange rate risk, because settlement is decoupled from the prevailing spot rate.
Choice B is incorrect because quanto contracts do not provide optionality on the strike price at expiration; their defining feature is the fixed exchange rate used for settlement.
Choice C is incorrect because settling at the prevailing spot rate describes standard international futures; quanto contracts use a fixed rate, which introduces a form of basis risk relative to spot rates.
Choice D is incorrect because margin requirements are a separate operational matter; the defining feature of a quanto is the fixed exchange rate in the payoff formula, not the currency of margin collateral.

A is correct. Individual stocks are subject to idiosyncratic jump events — earnings surprises, management changes, legal developments, product failures — that can cause severe and sudden price declines without any broad market move. These jump risks are concentrated and undiversifiable at the single-stock level. Option buyers demand a larger premium for downside protection on individual names, producing a steeper vol skew for OTM single-stock puts relative to index puts, where idiosyncratic jumps partially cancel across the diversified constituent portfolio.
Choice B is incorrect because single-stock options are generally less liquid than major index options, not more; the liquidity comparison runs in the opposite direction.
Choice C is incorrect because Black-Scholes assumptions (log-normal returns, no jumps) are violated more severely for individual stocks than for diversified indices — idiosyncratic fat tails and jump risk are larger at the single-name level.
Choice D is incorrect because option pricing is determined by market supply and demand within exchange rules; no regulatory requirement mandates minimum skew levels for single-stock versus index options.