Free CFA Level II Derivatives Practice Questions

Derivatives on the CFA Level II exam cover the Black-Scholes-Merton model, binomial option pricing, interest rate derivatives, credit default swaps, and exotic option structures. Weighted 5-10% (CFA Institute).

91 Questions
8 Easy
47 Medium
36 Hard
2026 Syllabus

Sample Questions

Question 1 Easy
Which of the following statements about option Greeks is most accurate?
Solution
A is correct.

Vega measures how much an option's price changes for a one-percentage-point change in the implied volatility of the underlying asset. Both calls and puts have positive vega, meaning they increase in value when volatility rises.
Question 2 Medium
An FRA described as a 6x12 FRA covers a borrowing period that:
Solution
C is correct.

An FRA described as 'AxB' (e.g., 6x12) means:
- The FRA settlement date is in A months (6 months from today).
- The underlying loan period ends in B months (12 months from today).
- The FRA covers the period from month 6 to month 12 (a 6-month borrowing period).

So a 6x12 FRA is a forward agreement on the 6-month interest rate, starting 6 months from now.
Question 3 Hard
Based on the vignette, the no-arbitrage 6-month forward rate for EUR/USD is closest to:
Solution
C is correct (1.0698).

Using covered interest rate parity with continuous compounding. The quote is EUR per USD, so EUR is the domestic currency and USD the foreign currency:
F0=S0 e(rEUR−rUSD)T=1.0800 e(0.0320−0.0510)(0.5)=1.0800 e−0.0095=1.0800×0.99054=1.06979.F_0 = S_0\,e^{(r_{EUR} - r_{USD})T} = 1.0800\,e^{(0.0320 - 0.0510)(0.5)} = 1.0800\,e^{-0.0095} = 1.0800 \times 0.99054 = 1.06979.
The computed value 1.06979 rounds to 1.0698 (choice C), not 1.0697.
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Guides & Articles

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