Updated: June 08, 2021

Sample Level 2 CFA® Exam Questions: Derivatives



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Andrew Star, level II CFA candidate, is preparing for the upcoming CFA exam he has enrolled in. He is currently reviewing derivatives. To check how much he already knows, he decides to have a go at some problems that he thinks likely to appear in the exam.

He is pretty sure that in the exam there will be some questions related to calculating prices of forwards on:

  • indices,
  • stocks paying dividends,
  • FRAs, or
  • fixed income securities.

Star chooses a couple of numerical problems related to different forward contracts he found in a financial magazine.

He gathers the following pieces of information:

  • The value of WIG Index equals 51,982. The continuously compounded dividend yield amounts to 2.4%. The continuously compounded risk-free interest rate is 5.5%.
  • The stock of Beta Company is currently trading at USD 12.00. It is expected to pay a dividend of USD 0.40 in 60 days and USD 0.50 in 89 days. The risk-free interest rate equals 5%.

Star wants to calculate no-arbitrage forward prices of 90-day forward contracts on the index and the stock.

Star also reads that Beta Company has recently entered into a FRA contract in order to reduce its interest rate risk and he thinks that it would be worthwhile to calculate the forward contract rate. He gathers the necessary data:

The management of Beta decided to use 1x4 FRA and the current LIBOR rates are:

  • 30-day LIBOR: 4.0%,
  • 120-day LIBOR: 4.75%.

The last numerical problem that Star solves is related to 1-year forward contract on 1,000 bonds that Beta Company entered into yesterday. One bond has a price of USD 1,000, the first coupon of USD 20 is to be paid in 270 days and the annual risk-free interest rate equals 5.3%.

Having solved the numerical problems, Star sends them together with the results that he obtained to his tutor at Soleadea, Mark Baumer, CFA. Andrew asks Mark if he could check them and give him some feedback.

Because Andrew also expects the value of forward contracts to be probable to occur in the exam, he starts to review the theory related to forward contract value as soon as he clicks on the “Send” button in his e-mail box.

During the revision, Star is concerned about whether he correctly understands the relation between the value of a forward contract and payments made by the both sides of the contract at the expiration of the contract. Therefore, again via e-mail, he asks his Soleadea tutor 2 questions:

Question 1

Is it true that:

if the value of a forward contract at expiration is positive ➔ the long makes a profit?

Question 2

And, conversely, is it true that:

if the value of a forward contract at expiration is negative ➔ the short makes a profit?

After a few hours, Star receives a response from Baumer. Overall, Mark is satisfied with the progress Andrew is making. He addresses the questions asked by Andrew, as well as points out the mistakes that Star made in the numerical problems and explains them. He also advises Andrew to take a look at a fragment of the reading related to the credit risk of forward contracts.


QUESTION 1

The no-arbitrage forward price of the 90-day forward contract on WIG Index is closest to:

  • a. 52,381.
  • b. 53,619.
  • c. 53,620.

QUESTION 2

The no-arbitrage forward price of the 90-day forward contract on the stock of Beta Company is closest to:

  • a. USD 11.22.
  • b. USD 11.23.
  • c. USD 11.24.

QUESTION 3

The forward contract rate of FRA used by Beta Company is closest to:

  • a. 4.98%.
  • b. 5.14%.
  • c. 5.29%.

QUESTION 4

The forward contract price of the bond forward is closest to:

  • a. USD 1031.9.
  • b. USD 1032.7.
  • c. USD 1077.1.

QUESTION 5

Which of the implications included in the questions sent by Star to Baumer is most likely correct?

  • a. Implication 1
  • b. Both Implication 1 and Implication 2
  • c. Neither Implication 1 nor Implication 2

QUESTION 6

Which of the following statements regarding the credit risk of a forward contract is most likely correct?

  • a. The higher the market value of a forward contract, the lower the credit risk of the contract to the short.
  • b. The lower the market value of a forward contract, the higher the credit risk of the contract to the short.
  • c. If the market value of a forward contract is positive, then the higher it is, the higher the credit risk of the contract to the long.

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