Free CAIA Level II Volatility and Complex Strategies Practice Questions
Volatility and complex strategies on CAIA Level II covers implied vs. realized volatility, option Greeks, VIX derivatives, structured products (principal-protected notes, reverse convertibles), exotic options, currency overlay strategies, and cryptocurrency trading strategies.
228 Questions
37 Easy
136 Medium
55 Hard
2026 Syllabus
Sample Questions
Question 1
Easy
In the context of options trading, theta is best described as:
🎉
Correct Answer: D
Solution
D 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).
Question 2
Medium
A quanto futures contract differs from a standard futures contract in which fundamental way?
🎉
Correct Answer: B
Solution
B 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.
Question 3
Hard
In the curriculum's frictionless-markets discussion of the law of one price, which statement most accurately describes the appropriateness of currency hedging across asset types?
🎉
Correct Answer: D
Solution
D is correct. The lesson shows that under the law of one price the home-currency return on an arbitragable asset is invariant to the currency in which the trade is denominated. Entering a forward at a rate that almost surely differs from the realized spot rate then introduces an FX bet on top of an asset position that was already currency-neutral in economic substance.
FreeFellow is a free exam prep library for actuarial (SOA & CAS), CFA, CFP, CPA, CAIA, GARP FRM, IRS Enrolled Agent, IMA CMA, and FINRA / NASAA securities licensing candidates. The entire question bank, written solutions, and lessons are free for every candidate, with no trial period and no credit card. Lessons include narrated audio, and every constructed-response item has a copy-to-AI prompt builder so candidates can paste their answer into their own ChatGPT or Claude for self-graded feedback; Fellow members get instant AI grading on essays against the official rubric (currently CFA Level III, expanding to other essay-bearing sections).
The 70% you need to pass (question bank, written solutions, lessons, formula sheet, mixed practice, readiness tracking) is free forever, with no trial period and no credit card. Become a Fellow ($59/quarter or $149/year per track) to unlock mock exams, flashcards with spaced repetition, performance analytics, AI essay grading, and a personalized study plan.