CFA Level I Derivatives & Risk Management Practice Questions
Derivatives & Risk Management makes up 4 of every 50 questions on a Tigertest CFA Level I practice test. Here are 10 of the 16 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on CFA Institute's Level I topic weights for 2027. Original questions with four choices (the real exam has three). Not affiliated with CFA Institute.
1. Compared with a forward contract, a futures contract is:
- A.Free of any margin requirement
- B.Standardized and marked to market daily
- C.Customized and settled only at expiry
- D.Traded only over the counter
Answer: B. Futures trade on exchanges in standard terms, with gains and losses settled daily through margin accounts and a clearinghouse. Forwards are private, customized and settled at the end.
2. An investor buys a call with a strike of 45 for a premium of 2.50. At expiry the stock is at 51. Her profit per share is:
- A.8.50
- B.2.50
- C.6.00
- D.3.50
Answer: D. Payoff = max(0, 51 - 45) = 6.00, less the premium of 2.50, gives a profit of 3.50. 6.00 is the payoff before the premium, and 8.50 adds the premium instead of subtracting it.
3. An investor writes a put with a strike of 40 and receives a premium of 2.50. Her maximum possible loss per share is:
- A.37.50
- B.2.50
- C.40.00
- D.42.50
Answer: A. The worst case is the stock falling to zero: she must buy at 40 a share worth nothing, offset by the 2.50 premium, a loss of 37.50. Her maximum gain is the premium.
4. A stock trades at 40, a European call costs 5 and the present value of the strike is 38. By put-call parity, the matching European put should cost:
- A.2
- B.5
- C.3
- D.7
Answer: C. Put-call parity: S + P = C + PV(K), so P = 5 + 38 - 40 = 3. 7 swaps the stock price and the present value of the strike.
5. A non-dividend-paying stock trades at 100 and the annual risk-free rate is 5%. The no-arbitrage price of a 1-year forward contract on it is:
- A.95.24
- B.105.13
- C.105.00
- D.100.00
Answer: C. F = S x (1 + r)^T = 100 x 1.05 = 105.00. Anything else allows a cash-and-carry or reverse arbitrage. 105.13 compounds continuously at 5%.
6. At the time a forward contract is entered into, its value to each party is typically:
- A.Zero
- B.The spot price
- C.The risk-free rate
- D.The forward price
Answer: A. The forward price is set so no money changes hands at inception, so the contract is worth zero to both sides. Its value changes as the underlying price moves.
7. A call option has a strike of 30 and the stock trades at 34. If the call's premium is 5.50, its time value is:
- A.9.50
- B.4.00
- C.5.50
- D.1.50
Answer: D. Intrinsic value = 34 - 30 = 4.00, so time value = 5.50 - 4.00 = 1.50. Time value shrinks toward zero as expiry nears.
8. A put option is in the money when the underlying price is:
- A.Above the premium paid
- B.Below the strike price
- C.Above the strike price
- D.Equal to the strike price
Answer: B. A put gives the right to sell at the strike, which is valuable only when the market price is lower. A call is in the money when the price is above the strike.
9. A futures trader's margin balance falls below the maintenance margin. She must deposit enough to bring the account back to the:
- A.Contract value
- B.Initial margin
- C.Maintenance margin
- D.Settlement price
Answer: B. A margin call requires variation margin to restore the account to the initial margin level, not just to the maintenance level.
10. An investor owns a stock and writes a call on it. This covered call strategy:
- A.Doubles exposure to the stock
- B.Creates a synthetic long put
- C.Protects fully against a fall
- D.Caps upside in return for income
Answer: D. The premium adds income, but if the stock rises above the strike the shares will be called away, so the upside is capped. Downside protection is only the premium.
Practice all 16 derivatives & risk management questions, and the rest of the 200-question bank, in the free CFA Level I training sets. Questions you miss come back until you have mastered them.
Start practicingFree to start. No account needed.