Derivatives are among the most challenging yet high-scoring areas of the CFA Level 1 exam. Candidates are often tested on concepts like futures, options, swaps, forwards, option pricing models, arbitrage strategies, and risk management applications.
To help you succeed, we have compiled a comprehensive set of 200+ Derivatives MCQs with detailed answers and explanations. These questions are based on the official CFA Institute Learning Outcomes (LOs) and are crafted to simulate real exam scenarios.
Whether you are preparing for CFA from the USA, UK, Canada, Australia, Europe, or Asia, these practice MCQs will help strengthen your conceptual clarity, problem-solving speed, and exam confidence.
👉 By practicing consistently, you will master key topics such as:
- Options & Futures Pricing
- Forward Contracts & Swaps
- Greeks (Delta, Gamma, Vega, Theta, Rho)
- Hedging & Arbitrage Strategies
- Black-Scholes & Binomial Models
📘 CFA Level 1 Derivatives – Practice Questions (1–200)
MCQ 1
A forward contract is best described as:
A) A standardized contract traded on exchanges.
B) A customized agreement between two parties to trade an asset in the future.
C) A derivative with daily settlement.
D) A contract that requires margin requirements.
✅ Correct Answer: B
📖 Explanation: A forward contract is a private, customized agreement between two parties to buy/sell an asset at a future date for a predetermined price. It differs from futures, which are standardized and exchange-traded.
MCQ 2
Which of the following is a characteristic of futures contracts but not forwards?
A) Standardized terms
B) Privately negotiated
C) No counterparty risk
D) Traded over-the-counter
✅ Correct Answer: A & C
📖 Explanation: Futures are standardized and traded on organized exchanges, with clearinghouses reducing counterparty risk. Forwards are OTC, customized, and carry higher default risk.
MCQ 3
The payoff of a European call option at maturity is:
A) Max(0, K – S)
B) Max(0, S – K)
C) S – K regardless of sign
D) K – S regardless of sign
✅ Correct Answer: B
📖 Explanation: A call option gives the right to buy at strike K. If spot price S > K, payoff = (S – K). If S ≤ K, payoff = 0.
MCQ 4
Which of the following reduces counterparty risk in derivative markets?
A) Margin requirements
B) Daily settlement
C) Clearinghouses
D) All of the above
✅ Correct Answer: D
📖 Explanation: Futures exchanges reduce counterparty risk through margining, daily mark-to-market, and centralized clearing.
MCQ 5
The intrinsic value of a put option is:
A) Max(0, K – S)
B) Max(0, S – K)
C) K – S regardless of sign
D) 0 always
✅ Correct Answer: A
📖 Explanation: A put gives the right to sell at strike K. If S < K, value = (K – S). Otherwise, it expires worthless.
MCQ 6
Which option strategy benefits from low volatility?
A) Long straddle
B) Short straddle
C) Long strangle
D) Long call
✅ Correct Answer: B
📖 Explanation: A short straddle profits when the underlying asset’s price stays close to the strike, i.e., in low volatility environments.
MCQ 7
The cost of carry model is mainly used for pricing:
A) Bonds
B) Forward and futures contracts
C) Swaps
D) Options
✅ Correct Answer: B
📖 Explanation: The cost of carry model prices forwards/futures as:
F = S × e^(r + storage – income) × T
MCQ 8
Which swap agreement involves exchanging fixed interest payments for floating?
A) Equity swap
B) Interest rate swap
C) Currency swap
D) Commodity swap
✅ Correct Answer: B
📖 Explanation: In an interest rate swap, one party pays fixed interest, and the other pays floating interest (often LIBOR or SOFR-based).
MCQ 9
A forward price is higher than the spot price when:
A) Carrying costs are negative
B) Interest rates are positive and no income is received from the asset
C) The asset provides a convenience yield
D) Spot and forward must always be equal
✅ Correct Answer: B
📖 Explanation: With positive rates and no benefits from holding the asset, forward prices exceed spot due to financing costs.
MCQ 10
The delta of a call option represents:
A) Sensitivity of option price to volatility
B) Sensitivity of option price to changes in spot price
C) Sensitivity of option price to interest rates
D) Sensitivity of option price to time decay
✅ Correct Answer: B
📖 Explanation: Delta measures how much the option price changes for a $1 change in the underlying asset’s price.
MCQ 11
Which of the following is a credit derivative?
A) Forward contract
B) Credit default swap (CDS)
C) Interest rate swap
D) Commodity futures
✅ Correct Answer: B
📖 Explanation: A CDS transfers credit risk from one party to another. If a borrower defaults, the protection seller compensates the buyer.
MCQ 12
If the futures price is less than the spot price, the market is said to be in:
A) Normal backwardation
B) Contango
C) Arbitrage-free equilibrium
D) Hedging inefficiency
✅ Correct Answer: A
📖 Explanation: Backwardation = futures < spot.
Contango = futures > spot.
MCQ 13
Which type of option can be exercised any time before maturity?
A) European
B) Asian
C) American
D) Bermudan
✅ Correct Answer: C
📖 Explanation: American options can be exercised at any time; European only at expiration. Bermudan = specific dates.
MCQ 14
In derivatives, gamma measures:
A) Rate of change of option delta with respect to stock price
B) Sensitivity of option price to volatility
C) Sensitivity of option to time
D) Sensitivity of option to interest rates
✅ Correct Answer: A
📖 Explanation: Gamma measures the curvature of the option price—how delta changes as the underlying asset price changes.
MCQ 15
The buyer of a futures contract:
A) Agrees to deliver the asset at maturity
B) Takes the long position
C) Pays a premium upfront
D) Has no margin requirement
✅ Correct Answer: B
📖 Explanation: The long futures position means buying the underlying asset at the agreed future date and price.
MCQ 16
Which derivative is most commonly used for currency risk management?
A) Interest rate swap
B) Currency futures
C) Currency swap
D) Credit default swap
✅ Correct Answer: C
📖 Explanation: A currency swap exchanges principal and interest payments in one currency for another.
MCQ 17
An option is said to be at-the-money if:
A) Strike = Spot
B) Strike > Spot
C) Spot > Strike
D) Time value = 0
✅ Correct Answer: A
📖 Explanation: At-the-money means spot price equals strike price.
MCQ 18
Which of the following best describes arbitrage?
A) Taking on risk for return
B) Earning a risk-free profit without investment
C) Buying risky assets at lower cost
D) Hedging downside risk
✅ Correct Answer: B
📖 Explanation: Arbitrage is exploiting mispricing to earn risk-free profit with no net investment.
MCQ 19
The Black-Scholes model is primarily used for pricing:
A) Futures contracts
B) European options
C) Forwards
D) Swaps
✅ Correct Answer: B
📖 Explanation: Black-Scholes is a theoretical model for pricing European calls and puts.
MCQ 20
A long put option combined with a long stock position creates:
A) Covered call
B) Protective put
C) Straddle
D) Collar
✅ Correct Answer: B
📖 Explanation: A protective put provides downside protection for a long stock position.
MCQ 21
What is the vega of an option?
A) Sensitivity to volatility
B) Sensitivity to time
C) Sensitivity to interest rates
D) Sensitivity to dividends
✅ Correct Answer: A
📖 Explanation: Vega measures how much the option’s price changes with 1% change in volatility.
MCQ 22
A collar strategy typically involves:
A) Buying stock, selling call, and buying put
B) Buying stock and selling put
C) Buying stock and buying call
D) Buying put and selling put
✅ Correct Answer: A
📖 Explanation: Collar = Long stock + Long put (downside protection) + Short call (income).
MCQ 23
Which type of option depends on the average price of the underlying?
A) European option
B) American option
C) Asian option
D) Barrier option
✅ Correct Answer: C
📖 Explanation: Asian options are path-dependent and based on average price.
MCQ 24
Which of the following is a type of exotic option?
A) Vanilla call
B) Put option
C) Barrier option
D) Covered call
✅ Correct Answer: C
📖 Explanation: Exotic options include barrier, Asian, lookback, etc., unlike vanilla options.
MCQ 25
What is the intrinsic value of a call option when the strike is $60 and the spot is $75?
A) $0
B) $15
C) –$15
D) $75
✅ Correct Answer: B
📖 Explanation: Intrinsic value = Max(0, S – K) = 75 – 60 = 15.
MCQ 26
Which risk is unique to derivatives compared to stocks and bonds?
A) Market risk
B) Credit risk
C) Counterparty risk
D) Liquidity risk
✅ Correct Answer: C
📖 Explanation: Derivatives involve counterparty risk—risk the other party defaults.
MCQ 27
Which hedge would be used by a wheat farmer?
A) Long put option
B) Long futures contract
C) Short futures contract
D) Covered call
✅ Correct Answer: C
📖 Explanation: Farmers short futures to lock in selling prices for crops.
MCQ 28
What is the primary role of derivatives in portfolio management?
A) Increase volatility
B) Speculation only
C) Hedging and risk management
D) Passive investing
✅ Correct Answer: C
📖 Explanation: Derivatives hedge market risks, interest rates, currencies, etc.
MCQ 29
The price of a forward contract is determined primarily by:
A) Spot price and cost of carry
B) Arbitrage-free conditions
C) Risk-free interest rates
D) All of the above
✅ Correct Answer: D
📖 Explanation: Forward pricing considers spot price, interest rate, carrying costs, and arbitrage.
MCQ 30
Which of the following is a long volatility strategy?
A) Short straddle
B) Long straddle
C) Covered call
D) Collar
✅ Correct Answer: B
📖 Explanation: A long straddle profits from large price moves (high volatility).
MCQ 31
In options trading, theta represents:
A) Sensitivity to volatility
B) Sensitivity to time decay
C) Sensitivity to interest rates
D) Sensitivity to dividends
✅ Correct Answer: B
📖 Explanation: Theta measures time decay—the loss in option value as expiry approaches.
MCQ 32
A swap agreement in which one party pays equity index returns and receives fixed interest is:
A) Currency swap
B) Interest rate swap
C) Equity swap
D) Credit default swap
✅ Correct Answer: C
📖 Explanation: Equity swaps exchange equity index returns for fixed or floating interest.
MCQ 33
What is the breakeven point for a long call option?
A) Strike price – premium
B) Strike price + premium
C) Premium only
D) Spot price
✅ Correct Answer: B
📖 Explanation: Breakeven = Strike + Premium.
MCQ 34
Which of the following is NOT a Greek?
A) Delta
B) Gamma
C) Lambda
D) Vega
✅ Correct Answer: C
📖 Explanation: Common Greeks: delta, gamma, vega, theta, rho. Lambda is not standard.
MCQ 35
In Black-Scholes model, volatility is assumed to be:
A) Constant
B) Changing over time
C) Zero
D) Negative
✅ Correct Answer: A
📖 Explanation: Black-Scholes assumes constant volatility and log-normal stock price distribution.
MCQ 36
Which arbitrage strategy exploits futures mispricing?
A) Covered interest arbitrage
B) Cash-and-carry arbitrage
C) Statistical arbitrage
D) Put-call parity
✅ Correct Answer: B
📖 Explanation: Cash-and-carry arbitrage locks in profits when futures are mispriced relative to spot and carry costs.
MCQ 37
If a put option’s delta is –0.5, what does it mean?
A) The option price falls $0.50 when the stock rises $1
B) The option price rises $0.50 when the stock rises $1
C) The option price is fixed at –0.5
D) The option’s volatility is 50%
✅ Correct Answer: A
📖 Explanation: Delta of puts is negative: as stock price rises, put value falls.
MCQ 38
Which of the following is most likely an exotic derivative?
A) European call
B) American put
C) Asian option
D) Common stock
✅ Correct Answer: C
📖 Explanation: Exotic derivatives include Asian, barrier, lookback options.
MCQ 39
An investor who sells a covered call:
A) Is bullish
B) Is neutral to mildly bearish
C) Is extremely bullish
D) Is extremely bearish
✅ Correct Answer: B
📖 Explanation: Covered call = Long stock + Short call. Neutral to slightly bearish outlook.
MCQ 40
A futures contract requires:
A) Premium paid upfront
B) Margin deposit and daily mark-to-market
C) No payments until maturity
D) Spot delivery
✅ Correct Answer: B
📖 Explanation: Futures require initial margin and daily settlement.
MCQ 41
What is the payoff of a long futures contract at maturity?
A) Spot – Futures price
B) Futures – Spot price
C) Zero always
D) Depends on interest rates
✅ Correct Answer: A
📖 Explanation: Payoff = Spot – Futures price at maturity.
MCQ 42
Which option strategy has limited loss and unlimited profit potential?
A) Long call
B) Short call
C) Long put
D) Short put
✅ Correct Answer: A
📖 Explanation: A long call has max loss = premium, unlimited profit if price rises.
MCQ 43
Which strategy mimics a risk-free bond?
A) Covered call
B) Protective put
C) Put-call parity
D) Straddle
✅ Correct Answer: C
📖 Explanation: Put-call parity shows how to replicate bond positions with options.
MCQ 44
Which option has the highest time decay?
A) Deep in-the-money
B) Deep out-of-the-money
C) At-the-money
D) Far from expiry
✅ Correct Answer: C
📖 Explanation: At-the-money options lose value fastest due to high time value.
MCQ 45
A commodity swap is typically used to:
A) Hedge equity risk
B) Hedge price risk in commodities
C) Hedge currency fluctuations
D) Hedge default risk
✅ Correct Answer: B
📖 Explanation: Commodity swaps exchange floating commodity prices for fixed prices.
MCQ 46
Which of the following is NOT a feature of forward contracts?
A) Customized
B) OTC traded
C) Standardized
D) Counterparty risk
✅ Correct Answer: C
📖 Explanation: Forwards are not standardized; they are customized OTC contracts.
MCQ 47
Rho measures:
A) Sensitivity to volatility
B) Sensitivity to time decay
C) Sensitivity to interest rates
D) Sensitivity to dividends
✅ Correct Answer: C
📖 Explanation: Rho measures option sensitivity to interest rate changes.
MCQ 48
Which of the following strategies profits from both upward and downward volatility?
A) Long straddle
B) Short straddle
C) Covered call
D) Protective put
✅ Correct Answer: A
📖 Explanation: Long straddle profits from large price moves, regardless of direction.
MCQ 49
If an option premium consists of both intrinsic value and time value, which component disappears at maturity?
A) Intrinsic value
B) Time value
C) Strike price
D) Spot price
✅ Correct Answer: B
📖 Explanation: Time value decays to zero at maturity; only intrinsic value remains.
MCQ 50
Which of the following is a key use of derivatives?
A) Hedging
B) Speculation
C) Arbitrage
D) All of the above
✅ Correct Answer: D
📖 Explanation: Derivatives are widely used for hedging risks, speculating, and arbitrage opportunities.
MCQ 51
Which is the primary difference between futures and forwards?
A) Futures are OTC; forwards are exchange-traded
B) Futures are standardized; forwards are customized
C) Futures have counterparty risk; forwards do not
D) Forwards require margin deposits; futures do not
✅ Correct Answer: B
📖 Explanation: Futures are standardized and exchange-traded with margining, while forwards are customized OTC contracts.
MCQ 52
A long futures hedge is appropriate when:
A) An investor is worried about falling prices
B) An investor expects to sell an asset in the future
C) An investor needs to lock in a purchase price
D) An investor is seeking arbitrage opportunities
✅ Correct Answer: C
📖 Explanation: Long hedge = lock in cost of purchasing an asset in the future.
MCQ 53
Which of the following is NOT a type of swap?
A) Interest rate swap
B) Currency swap
C) Equity swap
D) Forward rate agreement
✅ Correct Answer: D
📖 Explanation: FRA is a forward contract, not a swap.
MCQ 54
An option that activates or extinguishes if the underlying hits a certain price is:
A) Asian option
B) Barrier option
C) Vanilla option
D) Digital option
✅ Correct Answer: B
📖 Explanation: Barrier options are path-dependent, triggered by price levels.
MCQ 55
A synthetic forward can be created by:
A) Buying a call and selling a put at same strike
B) Selling a call and buying a put at same strike
C) Buying a stock and selling a put
D) Buying a bond and selling a call
✅ Correct Answer: A
📖 Explanation: Put–call parity allows synthetic forward creation: Long call + Short put = Forward long.
MCQ 56
If the correlation between two assets is +1, then the hedge ratio for cross-hedging is:
A) 0
B) 1
C) Infinity
D) Negative
✅ Correct Answer: B
📖 Explanation: Perfect positive correlation means a hedge ratio of 1 neutralizes risk.
MCQ 57
The basis in futures trading is defined as:
A) Spot – Futures price
B) Futures – Spot price
C) Carrying cost
D) Premium paid for options
✅ Correct Answer: A
📖 Explanation: Basis = Spot – Futures.
MCQ 58
Which of the following increases the price of a call option?
A) Higher strike price
B) Higher volatility
C) Lower spot price
D) Shorter time to maturity
✅ Correct Answer: B
📖 Explanation: Call option value rises with volatility, lower strike, higher spot, and longer maturity.
MCQ 59
The payoff diagram of a long straddle has:
A) Limited profit and limited loss
B) Unlimited profit, limited loss
C) Symmetric profit in both directions
D) Profit only if stock price rises
✅ Correct Answer: C
📖 Explanation: Long straddle profits from big moves up or down, losses limited to premiums.
MCQ 60
Which risk is mitigated through daily mark-to-market in futures contracts?
A) Credit risk
B) Market risk
C) Liquidity risk
D) Legal risk
✅ Correct Answer: A
📖 Explanation: Margining and daily settlement reduce credit risk.
MCQ 61
The Greeks are used to measure:
A) Arbitrage opportunities
B) Sensitivity of option prices to key variables
C) Bond yield spreads
D) Stock valuation multiples
✅ Correct Answer: B
📖 Explanation: Delta, gamma, theta, vega, rho measure option price sensitivity.
MCQ 62
A swap dealer primarily earns revenue by:
A) Taking speculative positions
B) Charging bid–ask spreads
C) Eliminating counterparty risk
D) Arbitraging mispricing
✅ Correct Answer: B
📖 Explanation: Dealers profit from spreads while providing liquidity.
MCQ 63
Which of the following is true about futures margining?
A) Futures are fully paid upfront
B) Margins are adjusted daily
C) Futures require no initial margin
D) Margins depend only on interest rates
✅ Correct Answer: B
📖 Explanation: Futures are marked-to-market daily with margin adjustments.
MCQ 64
A call option writer has:
A) Unlimited loss potential
B) Unlimited profit potential
C) Limited loss potential
D) Risk-free payoff
✅ Correct Answer: A
📖 Explanation: Short call can result in unlimited loss if stock rises sharply.
MCQ 65
The put–call parity equation is:
A) C – P = S – K/(1+r)^t
B) C + P = S + K
C) C – P = S + K
D) P – C = S – K
✅ Correct Answer: A
📖 Explanation: Put–call parity: Call – Put = Spot – PV(strike).
MCQ 66
Which of the following best describes a futures clearinghouse?
A) Eliminates market risk
B) Guarantees performance of both parties
C) Provides free trading
D) Creates new contracts daily
✅ Correct Answer: B
📖 Explanation: Clearinghouses act as intermediaries, guaranteeing contract performance.
MCQ 67
If a stock is expected to pay dividends, which option is more valuable?
A) American call
B) European call
C) American put
D) European put
✅ Correct Answer: C
📖 Explanation: Dividends lower call values but increase put values. American puts gain more value.
MCQ 68
Which derivative instrument is most suitable for interest rate risk hedging?
A) Credit default swap
B) Interest rate swap
C) Currency swap
D) Commodity futures
✅ Correct Answer: B
📖 Explanation: Interest rate swaps exchange fixed and floating payments to hedge interest risk.
MCQ 69
An investor who believes volatility will fall should trade:
A) Long straddle
B) Short straddle
C) Protective put
D) Long call
✅ Correct Answer: B
📖 Explanation: Short straddle profits when volatility drops and price stays stable.
MCQ 70
Which of the following is a risk of using derivatives?
A) Leverage risk
B) Model risk
C) Counterparty risk
D) All of the above
✅ Correct Answer: D
📖 Explanation: Derivatives carry multiple risks including leverage, model errors, and counterparty default.
MCQ 71
The no-arbitrage principle ensures:
A) Risk-free profits exist
B) Forward/futures prices align with spot plus carry costs
C) Prices are determined randomly
D) Hedging is impossible
✅ Correct Answer: B
📖 Explanation: Arbitrage aligns forward/futures with fair value (spot + carry).
MCQ 72
An investor who buys a stock and simultaneously writes a call is engaged in:
A) Protective put
B) Straddle
C) Covered call
D) Naked call
✅ Correct Answer: C
📖 Explanation: Covered call = Long stock + Short call.
MCQ 73
The implied volatility of an option is:
A) Historical volatility
B) Forecasted volatility
C) Volatility implied from market price of the option
D) Zero
✅ Correct Answer: C
📖 Explanation: Implied volatility is the volatility embedded in option prices by the market.
MCQ 74
Which is true for forward rate agreements (FRAs)?
A) They are exchange-traded
B) They settle in cash
C) They involve physical delivery
D) They are standardized contracts
✅ Correct Answer: B
📖 Explanation: FRAs are OTC derivatives that settle in cash.
MCQ 75
A short futures hedge is appropriate when:
A) An investor wants to lock in a selling price
B) An investor is worried about rising input costs
C) An investor expects volatility to fall
D) An investor wants unlimited profit
✅ Correct Answer: A
📖 Explanation: Short hedge protects against price declines for future sellers.
MCQ 76
Which of the following is an advantage of futures over forwards?
A) Higher customization
B) Higher liquidity and lower default risk
C) No daily settlement
D) Less transparency
✅ Correct Answer: B
📖 Explanation: Futures are standardized, liquid, and have lower default risk.
MCQ 77
What does delta hedging attempt to do?
A) Eliminate credit risk
B) Neutralize small changes in stock price
C) Guarantee profit
D) Eliminate time decay
✅ Correct Answer: B
📖 Explanation: Delta hedging reduces sensitivity to small stock price movements.
MCQ 78
Which of the following is true for swaptions?
A) They are options on swaps
B) They are standardized contracts
C) They are used only in equities
D) They eliminate credit risk
✅ Correct Answer: A
📖 Explanation: Swaptions give right but not obligation to enter into a swap.
MCQ 79
The margin call occurs when:
A) Futures position loses more than maintenance margin
B) Spot price moves in favor of investor
C) Futures expire worthless
D) Interest rates increase
✅ Correct Answer: A
📖 Explanation: If margin falls below maintenance level, margin call is triggered.
MCQ 80
Which of the following is an advantage of options?
A) Unlimited loss
B) Leverage with limited loss for buyers
C) Guaranteed profits
D) No counterparty risk
✅ Correct Answer: B
📖 Explanation: Options offer leverage with limited downside (premium).
MCQ 81
A long call + short put with same strike/maturity creates:
A) Forward long
B) Covered call
C) Straddle
D) Collar
✅ Correct Answer: A
📖 Explanation: By put–call parity, long call + short put replicates a forward long position.
MCQ 82
Which derivative is most commonly used by central banks?
A) Credit default swaps
B) Interest rate swaps
C) Currency forwards/swaps
D) Commodity futures
✅ Correct Answer: C
📖 Explanation: Central banks use currency swaps/forwards to manage FX reserves.
MCQ 83
In derivatives pricing, the cost of carry refers to:
A) Risk-free rate plus storage/financing costs
B) Only transaction costs
C) The futures margin
D) Brokerage commission
✅ Correct Answer: A
📖 Explanation: Cost of carry = financing + storage – convenience yield.
MCQ 84
A naked short call exposes the trader to:
A) Limited risk
B) Unlimited risk
C) Zero risk
D) Arbitrage profit
✅ Correct Answer: B
📖 Explanation: Naked short calls can incur unlimited losses.
MCQ 85
The Greeks most relevant for hedging volatility is:
A) Delta
B) Theta
C) Vega
D) Rho
✅ Correct Answer: C
📖 Explanation: Vega measures sensitivity to volatility changes.
MCQ 86
Which of the following is an exchange-traded derivative?
A) Credit default swap
B) Forward rate agreement
C) Commodity futures
D) Currency forward
✅ Correct Answer: C
📖 Explanation: Futures contracts are exchange-traded; others are OTC.
MCQ 87
A collar strategy caps both:
A) Profit and loss
B) Time and volatility risk
C) Interest rate and credit risk
D) Spot and futures price
✅ Correct Answer: A
📖 Explanation: Collar = Limited upside, limited downside.
MCQ 88
Which of the following reduces systemic risk in derivatives markets?
A) Standardization
B) Central clearinghouses
C) Margin requirements
D) All of the above
✅ Correct Answer: D
📖 Explanation: These mechanisms reduce default and contagion risk.
MCQ 89
Which is true for a European put option?
A) Can be exercised anytime
B) Can only be exercised at maturity
C) Is always more valuable than American put
D) Has unlimited profit and loss
✅ Correct Answer: B
📖 Explanation: European options can only be exercised at expiration.
MCQ 90
A farmer selling soybean futures to lock in price is:
A) Hedging
B) Speculating
C) Arbitraging
D) Leveraging
✅ Correct Answer: A
📖 Explanation: Futures hedges protect against price risk.
MCQ 91
Which of the following best explains value-at-risk (VaR) for derivatives?
A) Probability of bankruptcy
B) Worst-case loss within a given confidence level
C) Average expected return
D) Arbitrage-free valuation
✅ Correct Answer: B
📖 Explanation: VaR estimates maximum expected loss with a confidence interval.
MCQ 92
Which exotic option allows exercise at multiple dates?
A) Asian option
B) Bermudan option
C) Barrier option
D) Digital option
✅ Correct Answer: B
📖 Explanation: Bermudan options can be exercised on specific dates before expiry.
MCQ 93
If the futures price is greater than the fair value, arbitrageurs would:
A) Buy futures, sell spot
B) Sell futures, buy spot (cash-and-carry)
C) Do nothing
D) Buy options instead
✅ Correct Answer: B
📖 Explanation: Overpriced futures → short futures + long spot = arbitrage.
MCQ 94
The primary role of options markets is:
A) Risk transfer
B) Interest rate fixing
C) Eliminating arbitrage
D) Increasing credit risk
✅ Correct Answer: A
📖 Explanation: Options transfer risk between parties.
MCQ 95
Which option strategy benefits from falling volatility?
A) Short straddle
B) Long straddle
C) Protective put
D) Long call
✅ Correct Answer: A
📖 Explanation: Short straddle profits if prices remain stable (low volatility).
MCQ 96
What is the intrinsic value of a put option with strike $40 when stock trades at $35?
A) $0
B) $5
C) $35
D) –$5
✅ Correct Answer: B
📖 Explanation: Put intrinsic = Max(0, K – S) = 40 – 35 = 5.
MCQ 97
A swap spread is:
A) Difference between swap fixed rate and Treasury yield
B) Profit on arbitrage
C) Margin spread in futures
D) Difference between call and put premiums
✅ Correct Answer: A
📖 Explanation: Swap spread = Swap fixed rate – Treasury of same maturity.
MCQ 98
Which of the following is true for margin requirements?
A) They increase leverage risk
B) They protect against credit defaults
C) They remove market risk
D) They guarantee profit
✅ Correct Answer: B
📖 Explanation: Margin deposits reduce counterparty credit risk.
MCQ 99
A lookback option allows:
A) Exercise at average price
B) Exercise at the best historical price
C) Exercise at strike only
D) Exercise multiple times
✅ Correct Answer: B
📖 Explanation: Lookback options give payoff based on the best past price.
MCQ 100
The Greeks most important for time decay risk is:
A) Delta
B) Gamma
C) Theta
D) Vega
✅ Correct Answer: C
📖 Explanation: Theta measures sensitivity of option value to passage of time.
MCQ 101
Which of the following is the primary advantage of options over futures?
A) Options have unlimited loss potential
B) Options allow asymmetric payoff structures
C) Options require no premium payments
D) Options eliminate counterparty risk
✅ Correct Answer: B
📖 Explanation: Options provide asymmetric payoff, unlike futures which are symmetric.
MCQ 102
Which of the following is a characteristic of forward contracts?
A) Traded on exchanges
B) Standardized terms
C) Customized, OTC contracts
D) Daily settlement
✅ Correct Answer: C
📖 Explanation: Forwards are customized OTC agreements with counterparty risk.
MCQ 103
If a futures contract is in contango, then:
A) Futures price < Spot price
B) Futures price > Spot price
C) Futures price = Spot price
D) Arbitrage is not possible
✅ Correct Answer: B
📖 Explanation: Contango = Futures above spot due to carrying costs.
MCQ 104
A protective put strategy involves:
A) Buying a stock and buying a put option
B) Selling a stock and selling a put
C) Buying a call and selling a put
D) Buying a stock and selling a call
✅ Correct Answer: A
📖 Explanation: Protective put = insurance against downside.
MCQ 105
Which of the following is an example of a credit derivative?
A) Currency swap
B) Interest rate swap
C) Credit default swap (CDS)
D) Forward rate agreement
✅ Correct Answer: C
📖 Explanation: CDS transfers credit risk between parties.
MCQ 106
The time value of an option is always:
A) Negative
B) Zero
C) Positive before expiration
D) Independent of expiration
✅ Correct Answer: C
📖 Explanation: Time value > 0 until maturity; at expiry, it goes to zero.
MCQ 107
An investor shorting a futures contract is:
A) Hedging against rising prices
B) Hedging against falling prices
C) Speculating on rising prices
D) Speculating on falling prices
✅ Correct Answer: D
📖 Explanation: Short futures = bet on price decrease.
MCQ 108
The value of a forward contract at initiation is:
A) Zero
B) Positive
C) Negative
D) Equal to spot price
✅ Correct Answer: A
📖 Explanation: Forwards are set with no initial cost; value = 0 at inception.
MCQ 109
Which option position profits most from falling stock prices?
A) Long call
B) Long put
C) Short put
D) Covered call
✅ Correct Answer: B
📖 Explanation: Long put gains as prices drop.
MCQ 110
The intrinsic value of an option refers to:
A) Market volatility
B) Time value only
C) Immediate exercise value
D) Premium paid
✅ Correct Answer: C
📖 Explanation: Intrinsic = payoff if exercised now.
MCQ 111
Which of the following reduces counterparty risk in derivatives?
A) Clearinghouses
B) Arbitrageurs
C) Forward contracts
D) Naked options
✅ Correct Answer: A
📖 Explanation: Clearinghouses guarantee trades and reduce counterparty risk.
MCQ 112
A currency swap typically involves exchange of:
A) Fixed for floating interest payments
B) Principal and interest in two currencies
C) Only forward contracts
D) Equity returns
✅ Correct Answer: B
📖 Explanation: Currency swaps involve both principal and interest in two currencies.
MCQ 113
Which factor increases the value of a put option?
A) Higher strike price
B) Lower strike price
C) Higher stock price
D) Lower volatility
✅ Correct Answer: A
📖 Explanation: Higher strike = higher put value.
MCQ 114
A credit default swap (CDS) buyer:
A) Pays premiums and receives protection against default
B) Provides insurance and receives interest
C) Sells bonds at par
D) Exchanges equity for bonds
✅ Correct Answer: A
📖 Explanation: Buyer of CDS pays premium, gets payout if default occurs.
MCQ 115
Which of the following is NOT true for futures contracts?
A) They are standardized
B) They require margin deposits
C) They trade OTC only
D) They are marked-to-market daily
✅ Correct Answer: C
📖 Explanation: Futures are exchange-traded, not OTC.
MCQ 116
The primary risk of derivatives is:
A) Market risk
B) Liquidity risk
C) Model risk
D) All of the above
✅ Correct Answer: D
📖 Explanation: Derivatives are exposed to multiple risks.
MCQ 117
If implied volatility rises, option premiums:
A) Increase
B) Decrease
C) Stay constant
D) Become negative
✅ Correct Answer: A
📖 Explanation: Higher volatility = higher option prices.
MCQ 118
Which of the following strategies has limited profit and limited loss?
A) Covered call
B) Protective put
C) Long straddle
D) Short call
✅ Correct Answer: A
📖 Explanation: Covered call caps upside, provides limited downside protection.
MCQ 119
Which is the correct definition of a forward rate agreement (FRA)?
A) Option on a swap
B) Cash-settled forward contract on interest rates
C) Futures contract on currencies
D) Insurance on default risk
✅ Correct Answer: B
📖 Explanation: FRA = OTC forward on future interest rates.
MCQ 120
A long butterfly spread is constructed by:
A) Long 1 call (low strike), Short 2 calls (mid strike), Long 1 call (high strike)
B) Short 1 call, Long 2 puts, Short 1 put
C) Long stock, Short call
D) Long straddle
✅ Correct Answer: A
📖 Explanation: Butterfly spread profits in low-volatility scenarios.
MCQ 121
An equity swap exchanges:
A) Equity returns for fixed or floating interest
B) Equity returns for credit risk
C) Bond returns for equity
D) Options for forwards
✅ Correct Answer: A
📖 Explanation: Equity swaps exchange stock index return for fixed/floating cash flows.
MCQ 122
Which of the following best describes a call option delta?
A) Rate of change of call price with respect to stock price
B) Probability of exercising
C) Difference between strike and stock price
D) Option’s time decay
✅ Correct Answer: A
📖 Explanation: Delta measures sensitivity to stock price changes.
MCQ 123
The implied repo rate relates to:
A) Arbitrage pricing of forwards/futures
B) Option premium decay
C) Interest rate swaps
D) CDS spreads
✅ Correct Answer: A
📖 Explanation: Implied repo rate = cost of financing embedded in futures price.
MCQ 124
Which option strategy provides downside protection and upside participation?
A) Covered call
B) Protective put
C) Collar
D) Short straddle
✅ Correct Answer: B
📖 Explanation: Protective put = stock upside with insurance.
MCQ 125
A short put option has:
A) Unlimited profit, limited loss
B) Limited profit, substantial loss potential
C) Unlimited profit and unlimited loss
D) Zero payoff
✅ Correct Answer: B
📖 Explanation: Short put earns limited premium, but large losses if stock drops.
MCQ 126
Which factor decreases the value of a call option?
A) Higher volatility
B) Higher strike price
C) Higher spot price
D) Longer maturity
✅ Correct Answer: B
📖 Explanation: Higher strike makes call less valuable.
MCQ 127
The futures price is derived from:
A) Spot price + cost of carry – convenience yield
B) Spot price only
C) Arbitrage-free condition
D) Both A and C
✅ Correct Answer: D
📖 Explanation: Futures = spot + cost of carry – yield, based on arbitrage-free pricing.
MCQ 128
The vega of an option measures:
A) Sensitivity to volatility
B) Sensitivity to interest rates
C) Sensitivity to stock price
D) Sensitivity to time
✅ Correct Answer: A
📖 Explanation: Vega = change in option price with volatility.
MCQ 129
A swaption buyer has the right to:
A) Enter into a swap at future date
B) Buy futures at spot price
C) Exercise a put on bonds
D) Arbitrage options
✅ Correct Answer: A
📖 Explanation: Swaption = option to enter into a swap.
MCQ 130
The main purpose of derivatives markets is:
A) Gambling
B) Risk management and hedging
C) Stock price determination
D) Eliminating regulation
✅ Correct Answer: B
📖 Explanation: Derivatives allow risk transfer and hedging.
MCQ 131
Which of the following best describes a long straddle strategy?
A) Long call and short put with same strike
B) Long call and long put with same strike and maturity
C) Short call and short put with same strike
D) Long stock and short call
✅ Correct Answer: B
📖 Explanation: Long straddle = long call + long put at same strike; profits from high volatility.
MCQ 132
The gamma of an option measures:
A) Rate of change of delta with respect to stock price
B) Option sensitivity to volatility
C) Option sensitivity to interest rates
D) Premium decay
✅ Correct Answer: A
📖 Explanation: Gamma = how much delta changes when the stock price moves.
MCQ 133
If an option is deep in-the-money, its delta will be:
A) Close to 0
B) Close to 1 (call) or -1 (put)
C) Always 0.5
D) Negative for calls
✅ Correct Answer: B
📖 Explanation: Deep ITM call delta ≈ 1, deep ITM put delta ≈ -1.
MCQ 134
The basis in futures markets refers to:
A) Difference between futures and spot price
B) Interest earned on margin accounts
C) Hedger’s gain or loss
D) Swap settlement value
✅ Correct Answer: A
📖 Explanation: Basis = spot – futures.
MCQ 135
If a hedger is long the underlying asset, the most common hedge is:
A) Short futures
B) Long futures
C) Short call
D) Short put
✅ Correct Answer: A
📖 Explanation: Long asset exposure can be hedged by short futures.
MCQ 136
An interest rate swap involves:
A) Exchange of fixed for floating interest payments
B) Exchange of equities for bonds
C) Exchange of currencies
D) Exchange of forwards for options
✅ Correct Answer: A
📖 Explanation: The most common swap is fixed-for-floating interest payments.
MCQ 137
Which of the following best describes a naked call?
A) Writing a call without owning the stock
B) Buying a call with protective stock
C) Writing a call with stock ownership
D) Buying a put option without hedge
✅ Correct Answer: A
📖 Explanation: Naked call = short call with no stock cover; risk is unlimited.
MCQ 138
The theta of an option measures:
A) Change in option price with stock price
B) Change in option price with volatility
C) Change in option price with time decay
D) Change in option price with interest rates
✅ Correct Answer: C
📖 Explanation: Theta = sensitivity to time decay.
MCQ 139
Which statement about swaps is correct?
A) Swaps are traded on organized exchanges
B) Swaps are standardized contracts
C) Swaps are customizable OTC agreements
D) Swaps always require margin
✅ Correct Answer: C
📖 Explanation: Swaps are OTC, tailor-made contracts.
MCQ 140
A synthetic forward can be created by:
A) Long call + short put (same strike & maturity)
B) Long call + long put (different strikes)
C) Short call + long stock
D) Long stock + short futures
✅ Correct Answer: A
📖 Explanation: Put-call parity allows replication of forwards using options.
MCQ 141
Which of the following increases the value of a call option?
A) Lower spot price
B) Higher strike price
C) Higher volatility
D) Shorter time to expiry
✅ Correct Answer: C
📖 Explanation: Higher volatility = higher call premiums.
MCQ 142
If futures price = $105, spot = $100, carrying cost = $4, the market is:
A) In backwardation
B) In contango
C) At fair value
D) Arbitrage-free
✅ Correct Answer: B
📖 Explanation: Futures > spot due to carrying costs → contango.
MCQ 143
Which of the following is a Greek that measures interest rate sensitivity?
A) Delta
B) Vega
C) Theta
D) Rho
✅ Correct Answer: D
📖 Explanation: Rho = change in option value with interest rate.
MCQ 144
An arbitrage opportunity exists if:
A) Two identical assets trade at different prices
B) Futures price = spot price + carrying cost
C) Options have zero intrinsic value
D) Swaps are OTC
✅ Correct Answer: A
📖 Explanation: Arbitrage = risk-free profit due to price discrepancies.
MCQ 145
Which of the following strategies is designed to profit from low volatility?
A) Long straddle
B) Short straddle
C) Protective put
D) Covered call
✅ Correct Answer: B
📖 Explanation: Short straddle profits if prices remain stable.
MCQ 146
A commodity swap is typically used to:
A) Hedge against credit default
B) Exchange floating interest payments
C) Lock in commodity prices
D) Trade equities for bonds
✅ Correct Answer: C
📖 Explanation: Commodity swaps fix future commodity prices.
MCQ 147
The notional principal in a swap is:
A) Amount actually exchanged
B) Reference amount for calculating cash flows
C) Settlement price of futures
D) Premium of an option
✅ Correct Answer: B
📖 Explanation: Notional is a reference; not exchanged.
MCQ 148
If an option is out-of-the-money, its intrinsic value is:
A) Positive
B) Zero
C) Negative
D) Equal to time value
✅ Correct Answer: B
📖 Explanation: Out-of-money options have zero intrinsic value.
MCQ 149
Which of the following is the most risky option strategy?
A) Protective put
B) Covered call
C) Naked call
D) Collar
✅ Correct Answer: C
📖 Explanation: Naked calls have unlimited loss potential.
MCQ 150
The payoff of a long futures position at maturity is:
A) Futures price – Spot price
B) Spot price – Futures price
C) Zero always
D) Intrinsic value of option
✅ Correct Answer: B
📖 Explanation: Long futures payoff = Spot – Futures price at expiration.
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MCQ 151
Which of the following is a protective put strategy?
A) Long stock + short put
B) Long stock + long put
C) Short stock + long call
D) Long put only
✅ Correct Answer: B
📖 Explanation: A protective put hedges downside risk while maintaining upside potential.
MCQ 152
An option premium is made up of:
A) Intrinsic value only
B) Time value only
C) Intrinsic value + Time value
D) Risk-free rate
✅ Correct Answer: C
📖 Explanation: Premium = intrinsic + time value.
MCQ 153
Which option Greek measures sensitivity to volatility?
A) Delta
B) Vega
C) Theta
D) Rho
✅ Correct Answer: B
📖 Explanation: Vega = option value change with volatility.
MCQ 154
If a call option is at-the-money, its delta is approximately:
A) 0
B) 0.5
C) 1
D) -0.5
✅ Correct Answer: B
📖 Explanation: ATM call ≈ 0.5 delta.
MCQ 155
A swap dealer most likely acts as:
A) Principal taking risk
B) Broker arranging swaps
C) Market maker
D) All of the above
✅ Correct Answer: D
📖 Explanation: Swap dealers act as principals, brokers, and market makers.
MCQ 156
The law of one price ensures that:
A) Arbitrage opportunities persist
B) Identical assets must sell at the same price
C) Futures always equal spot prices
D) Options expire at intrinsic value
✅ Correct Answer: B
📖 Explanation: Law of one price prevents arbitrage.
MCQ 157
If spot = $50, strike = $55, the call option is:
A) ITM (in-the-money)
B) ATM (at-the-money)
C) OTM (out-of-the-money)
D) None
✅ Correct Answer: C
📖 Explanation: Call with strike > spot = OTM.
MCQ 158
Which of the following positions provides downside protection but limits upside?
A) Covered call
B) Protective put
C) Straddle
D) Naked put
✅ Correct Answer: A
📖 Explanation: Covered call caps upside but protects downside.
MCQ 159
Which is true about forward contracts?
A) Standardized and exchange traded
B) Settled daily
C) Customized and traded OTC
D) Margin required daily
✅ Correct Answer: C
📖 Explanation: Forwards are private OTC contracts.
MCQ 160
Which arbitrage strategy involves shorting futures and buying the asset?
A) Reverse cash-and-carry
B) Cash-and-carry
C) Put-call parity
D) Covered interest arbitrage
✅ Correct Answer: A
📖 Explanation: Reverse cash-and-carry: short futures, long asset.
MCQ 161
The intrinsic value of a put is:
A) Max(0, K – S)
B) Max(0, S – K)
C) S – K always
D) Zero always
✅ Correct Answer: A
📖 Explanation: Put value = K – S if positive.
MCQ 162
The margin requirement in futures is primarily to:
A) Guarantee profit
B) Prevent speculation
C) Mitigate credit risk
D) Hedge exposure
✅ Correct Answer: C
📖 Explanation: Margin ensures performance and reduces counterparty risk.
MCQ 163
Which strategy profits if stock price rises significantly?
A) Short straddle
B) Covered call
C) Long straddle
D) Short call
✅ Correct Answer: C
📖 Explanation: Long straddle benefits from high volatility (up or down).
MCQ 164
A credit default swap (CDS) protects:
A) Lender against borrower default
B) Borrower against rate changes
C) Equity holders against loss
D) None
✅ Correct Answer: A
📖 Explanation: CDS transfers credit risk.
MCQ 165
The fair futures price is determined by:
A) Arbitrary market demand
B) Put-call parity
C) Spot price + carrying cost – income
D) Intrinsic value of options
✅ Correct Answer: C
📖 Explanation: Cost-of-carry model: Futures = Spot + carry – income.
MCQ 166
The implied volatility is derived from:
A) Stock returns
B) Option prices
C) Futures prices
D) Swap rates
✅ Correct Answer: B
📖 Explanation: Implied volatility is backed out from option premiums.
MCQ 167
Which option has the highest time decay (theta)?
A) ATM option
B) Deep ITM
C) Deep OTM
D) All equal
✅ Correct Answer: A
📖 Explanation: ATM options lose value fastest as expiry nears.
MCQ 168
A futures contract requires:
A) No initial investment
B) Only margin deposit
C) Premium payment like options
D) None
✅ Correct Answer: B
📖 Explanation: Futures require margin, not premium.
MCQ 169
Which is the most effective hedge for a US exporter due to receive €?
A) Long EUR/USD futures
B) Short EUR/USD futures
C) Buy USD call
D) Sell EUR put
✅ Correct Answer: B
📖 Explanation: Exporter will be short EUR risk, so shorting EUR futures hedges.
MCQ 170
An American option differs from a European option because it can be:
A) Traded on exchanges only
B) Exercised anytime before maturity
C) Cheaper in premium
D) Always more valuable
✅ Correct Answer: B
📖 Explanation: American options allow early exercise.
MCQ 171
Which strategy benefits from small price movements?
A) Short straddle
B) Long straddle
C) Long strangle
D) Naked call
✅ Correct Answer: A
📖 Explanation: Short straddle profits from stability.
MCQ 172
The payoff of a short put at expiration is:
A) Max(0, K – S)
B) –Max(0, K – S)
C) Max(0, S – K)
D) S – K
✅ Correct Answer: B
📖 Explanation: Short put loses if stock falls below strike.
MCQ 173
If the basis widens unexpectedly, a short hedger:
A) Gains
B) Loses
C) No impact
D) Arbitrages
✅ Correct Answer: B
📖 Explanation: Widening basis = higher futures loss for short hedger.
MCQ 174
Which option is most sensitive to volatility changes?
A) Deep ITM
B) Deep OTM
C) ATM
D) None
✅ Correct Answer: C
📖 Explanation: ATM options have highest vega.
MCQ 175
The Black-Scholes model does NOT assume:
A) Lognormal stock returns
B) Constant volatility
C) Arbitrage opportunities exist
D) Continuous trading
✅ Correct Answer: C
📖 Explanation: Model assumes no arbitrage.
MCQ 176
If spot = $100, strike = $90, put option’s intrinsic value is:
A) $0
B) $10
C) –$10
D) Cannot be determined
✅ Correct Answer: A
📖 Explanation: Put intrinsic = Max(0, K – S) = 0.
MCQ 177
The mark-to-market process in futures means:
A) Settlement only at expiry
B) Daily profit/loss settlement
C) Intrinsic value calculation
D) Premium adjustments
✅ Correct Answer: B
📖 Explanation: Futures contracts are marked to market daily.
MCQ 178
Which strategy locks in a guaranteed borrowing cost?
A) Futures hedge
B) Interest rate swap
C) Naked option
D) Straddle
✅ Correct Answer: B
📖 Explanation: Interest rate swap fixes future borrowing rates.
MCQ 179
Which of the following is not a derivative instrument?
A) Swap
B) Option
C) Bond
D) Futures
✅ Correct Answer: C
📖 Explanation: Bonds are direct securities, not derivatives.
MCQ 180
A long put is most profitable when:
A) Stock price rises
B) Stock price falls
C) Volatility decreases
D) Stock remains constant
✅ Correct Answer: B
📖 Explanation: Put profits if stock falls below strike.
MCQ 181
Which hedge is appropriate for a short futures position?
A) Long futures
B) Long stock
C) Short put
D) Covered call
✅ Correct Answer: A
📖 Explanation: Short futures risk is rising prices; long futures offsets.
MCQ 182
An equity swap involves exchange of:
A) Equity returns for interest payments
B) Equity for debt
C) Debt for equity shares
D) Equity for options
✅ Correct Answer: A
📖 Explanation: Equity swap = equity returns vs fixed/float interest.
MCQ 183
The payoff of a covered call equals:
A) Stock payoff – call payoff
B) Call payoff – stock payoff
C) Put payoff only
D) Zero
✅ Correct Answer: A
📖 Explanation: Covered call payoff = stock – short call.
MCQ 184
Which instrument is most exposed to counterparty risk?
A) Exchange-traded futures
B) Options on exchanges
C) OTC swaps
D) Treasury bonds
✅ Correct Answer: C
📖 Explanation: OTC swaps = high counterparty risk.
MCQ 185
A short futures hedge is appropriate for:
A) Importer worried about currency depreciation
B) Exporter worried about currency appreciation
C) Investor worried about falling asset prices
D) None
✅ Correct Answer: C
📖 Explanation: Short futures hedge falling prices.
MCQ 186
Which factor decreases the value of a put option?
A) Higher strike
B) Higher spot price
C) Longer maturity
D) Higher volatility
✅ Correct Answer: B
📖 Explanation: Rising spot reduces put value.
MCQ 187
The maximum loss of a long call is:
A) Unlimited
B) Strike price
C) Premium paid
D) Zero
✅ Correct Answer: C
📖 Explanation: Long call loss limited to premium paid.
MCQ 188
Which hedge is best for an investor with a portfolio of equities?
A) Long put on market index
B) Short put
C) Naked call
D) Reverse swap
✅ Correct Answer: A
📖 Explanation: Index put hedges portfolio downside.
MCQ 189
Which strategy is suitable if investor expects moderate stock rise?
A) Long call
B) Covered call
C) Naked put
D) Short straddle
✅ Correct Answer: B
📖 Explanation: Covered call = profit in moderate upward movement.
MCQ 190
The cross-hedging technique involves:
A) Hedging one asset with correlated asset futures
B) Hedging using options
C) Hedging currency with swaps
D) Hedging with short selling
✅ Correct Answer: A
📖 Explanation: Cross hedge = using related asset futures.
MCQ 191
A long call position benefits most from:
A) Rising volatility
B) Falling interest rates
C) Falling volatility
D) Falling stock prices
✅ Correct Answer: A
📖 Explanation: Calls gain from volatility and rising prices.
MCQ 192
Which option strategy is risk-free?
A) Protective put
B) Covered call
C) Synthetic forward
D) None
✅ Correct Answer: D
📖 Explanation: No option strategy is truly risk-free.
MCQ 193
Which derivative is most used for hedging currency risk?
A) Futures
B) Swaps
C) Forwards
D) Options
✅ Correct Answer: C
📖 Explanation: Forwards are most used for hedging currencies.
MCQ 194
The Greeks are used by:
A) Arbitrageurs
B) Speculators
C) Hedgers
D) All of the above
✅ Correct Answer: D
📖 Explanation: Greeks help all types of traders manage risk.
MCQ 195
A strangle differs from a straddle because:
A) Strike prices differ
B) Expiry differs
C) It is always risk-free
D) None
✅ Correct Answer: A
📖 Explanation: Strangle uses different strikes, same expiry.
MCQ 196
Which futures market position has unlimited loss potential?
A) Long futures
B) Short futures
C) Both
D) None
✅ Correct Answer: C
📖 Explanation: Both long and short futures have unlimited risk.
MCQ 197
The initial margin in futures is:
A) Guarantee against default
B) Premium like an option
C) Arbitrary fee
D) Tax requirement
✅ Correct Answer: A
📖 Explanation: Initial margin protects against default.
MCQ 198
If volatility increases, which position benefits most?
A) Long straddle
B) Short straddle
C) Covered call
D) Naked call
✅ Correct Answer: A
📖 Explanation: Long straddle profits from volatility.
MCQ 199
Which is a benefit of derivatives markets?
A) Risk transfer and price discovery
B) Guaranteed profits
C) Free trading
D) Elimination of credit risk
✅ Correct Answer: A
📖 Explanation: Derivatives transfer risk and help discover prices.
MCQ 200
Which of the following best describes the purpose of derivatives?
A) Hedging, speculation, and arbitrage
B) Guaranteed returns
C) Avoiding taxes
D) Market manipulation
✅ Correct Answer: A
📖 Explanation: Derivatives serve hedging, speculation, and arbitrage purposes.
By solving these 200 CFA Level 1 Derivatives MCQs, you’ve taken a big step toward mastering one of the toughest exam topics. Remember, the CFA exam not only tests knowledge but also speed, accuracy, and application skills.
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