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).

87 Questions

16 Easy

35 Medium

36 Hard

2026 Syllabus

Sample Questions

Question 1 Easy

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 2 Medium

Based on the vignette, at expiration Park's payer swaption will most likely be:

Solution

A is correct.

A payer swaption gives the holder the right to pay fixed. It is in the money when the current market swap rate exceeds the exercise rate. The market 3-year swap rate is 4.35%, which exceeds the exercise rate of 4.00%. If the swap rate remains above 4.00% at expiration, the swaption will be in the money, and Park would exercise it to lock in a below-market fixed rate.

Question 3 Hard

Based on the vignette, the no-arbitrage 6-month forward rate for EUR/USD is closest to:

Solution

B is correct (approximately 1.0697).

Using covered interest rate parity with continuous compounding. The quote is EUR per USD, so EUR is the domestic currency and USD is the foreign currency:

F_0 = S_0 \times e^{(r_{EUR} - r_{USD}) \times T}

= 1.0800 \times e^{(0.0320 - 0.0510) \times 0.5}

= 1.0800 \times e^{-0.0095}

= 1.0800 \times 0.99054 = 1.0698

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