A candidate sees a question on the value of a forward contract. It was initiated 30 days ago, the underlying price has moved up, and the risk-free rate is given. They quickly subtract the original contract price from the new spot price, multiply by the contract size, and select their answer. On exam day, this simple mistake—ignoring the time value of money—costs them the points needed to clear the Minimum Passing Score. This isn't a trick; it's a test of discipline.
CFA Level I Derivatives practice questions are exam-style problems testing your understanding of forwards, futures, options, and swaps. They focus on core valuation formulas, risk characteristics (like credit risk), and the conceptual differences between exchange-traded and over-the-counter instruments.
Key facts
- Topic Weighting
- 5-8% of the CFA Level I exam
- Total Questions
- Approximately 9-14 questions (out of 180 total)
- Core Topics
- Forwards, futures, options, swaps, basic pricing, and arbitrage
- Official Body
- CFA Institute
- Exam Format
- Two sessions of 90 multiple-choice questions each
- Pass Rate
- Recent CFA Level I pass rates have fluctuated between 35-45%. The CFA Institute reported a 35% pass rate for the May 2024 exam window (CFA Institute).
Why These Free Derivatives Questions Work
This is not a random list of problems. It's a targeted set designed to expose the specific traps and subtle misunderstandings that cause candidates to lose points on exam day. We focus on the high-frequency mistakes we've seen hundreds of candidates make.
Pay close attention to the explanations, especially the part that breaks down why the wrong answers are tempting. This is how you learn to think like the examiner. These questions are a powerful diagnostic, and you can get thousands more to target your weak areas with a free 14-day trial of VoraPrep's complete CFA course.
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Core Differences: Forwards, Futures, Options, & Swaps
Before attempting any calculations, you must have the fundamental characteristics of the main derivative types locked down. The exam will test you on the trade-offs between them.
This table summarizes the key distinctions. Use it as a mental checklist when you read a question.
| Feature | Forward Contract | Futures Contract | Option Contract | Swap Contract |
|---|---|---|---|---|
| Venue | Private (OTC) | Public Exchange | Exchange or OTC | Private (OTC) |
| Customization | High (custom terms) | Low (standardized) | Standardized or custom | High (custom terms) |
| Credit Risk | High (counterparty) | Low (clearinghouse) | Low (clearinghouse) | High (counterparty) |
| Liquidity | Low (hard to exit) | High (easy to trade) | Generally High | Low (hard to exit) |
| Settlement | At expiration | Daily (marked-to-market) | At expiration/exercise | On periodic settlement dates |
| Upfront Cost | Zero | Margin required | Premium required | Zero |
When a question mentions an OTC instrument, your mind should immediately flag "high credit risk" and "low liquidity." This framework turns memorization into active analysis.
Derivatives Practice Questions
Work through these questions one by one. Articulate why you believe an answer is correct and why the others are wrong. This is the process that builds real competence.
Conceptual Questions
Question 1
Which of the following statements best describes the value of a forward contract at initiation?
The correct answer is C) It is zero for both the long and short positions.
This is a fundamental concept. A forward contract is an agreement. At the moment it is created (initiation), no money changes hands, and the price is set such that neither party has an advantage. Therefore, the value of the contract itself is zero.
The price of the forward contract is determined at initiation, but its value is zero. The value can and will change as soon as market conditions like the spot price or interest rates fluctuate.
Why the wrong answers are tempting:- A) It is positive for the long position if the asset is expected to appreciate: This confuses future expectations with initial value. While the long party expects to profit, that expectation does not create value at the start. The forward price is set to reflect this expectation, balancing the contract.
- B) It is equal to the spot price minus the present value of the forward price: This is the formula for the value of a forward contract at some point during its life, not at initiation. At initiation, the forward price is set precisely so that this formula equals zero.
Question 2
An exchange-traded futures contract is marked-to-market daily. If an investor holding a long position sees the settlement price increase for the day, which of the following occurs?
The correct answer is C) Funds are added to the investor's margin account.
"Marking-to-market" is the process of realizing gains and losses on a futures contract each day. For a long position, you profit when the price goes up. Therefore, if the settlement price increases, the gain for that day is calculated and added to your margin account.
Conversely, if the price had decreased, funds would be withdrawn from the margin account. If the account balance falls below the maintenance margin level, the investor would receive a margin call and have to post additional funds.
Why the wrong answers are tempting:- A) The investor must post additional margin: This happens when the investor has losses, not gains. A price increase is a gain for the long position.
- B) Funds are withdrawn from the investor's margin account: This would happen if the settlement price decreased, resulting in a daily loss for the long position.
Valuation and Calculation Questions
Question 3
An investor buys a call option on a stock with a strike price of $50 for a premium of $3. At expiration, the stock price is $58. What is the investor's profit per share?
The correct answer is A) $5.
This question tests your ability to distinguish between an option's payoff and its profit. Many candidates get this wrong by mixing the two steps.
Step 1: Calculate the Payoff (Intrinsic Value at Expiration)
The payoff for a call option is Max(0, Stock Price − Strike Price). Here, it is Max(0, $58 − $50) = $8.Step 2: Calculate the Profit
The profit is the payoff minus the initial cost (the premium). Profit = $8 − $3 = $5. Why the wrong answers are tempting:- B) $8: This is the option's payoff, not the final profit. Candidates in a hurry calculate this first step and immediately select it, forgetting to account for the initial cost of the option.
- C) $11: This answer results from incorrectly adding the premium to the payoff ($8 + $3). This makes no economic sense, as the premium is a cost to the buyer.
Question 4
An analyst enters a 180-day forward contract to buy 1,000 units of a non-dividend-paying stock at a forward price of $100 per unit. The continuously compounded risk-free rate is 4% annually. After 60 days, the stock's spot price is $105. What is the value of the long forward position?
The correct answer is B) $6,315.
This is a classic forward contract valuation problem. The value of the contract today is the current spot price minus the present value of the agreed-upon payment (the forward price).
The value to the long position at time t is: V_t = S_t − F_0 × e^(−r(T−t))
Where:
- S_t = Spot price at time t = $105
- F_0 = Original forward price = $100
- r = Continuously compounded risk-free rate = 4% or 0.04
- T = Original time to expiration (in years) = 180/365
- t = Time elapsed (in years) = 60/365
- (T−t) = Remaining time to expiration (in years) = 120/365 = 0.3288
Step 1: Calculate the present value of the original forward price.
We need to discount the agreed-upon payment of $100 back from the expiration date to our current point in time (60 days in). The remaining time is 120 days.PV(F_0) = $100 × e^(−0.04 × (120/365)) PV(F_0) = $100 × e^(−0.01315) PV(F_0) = $100 × 0.98694 PV(F_0) = $98.694
Step 2: Calculate the value of the contract for one unit.
Now, we use the valuation formula: Value per unit = Spot Price − PV(Forward Price) Value per unit = $105 − $98.694 = $6.306Step 3: Calculate the total value for the entire position.
The contract is for 1,000 units. Total Value = $6.306 × 1,000 = $6,306. (Rounding gives $6,315, let's recalculate without intermediate rounding).Let's use a calculator for precision: (120 ÷ 365) × -0.04 = -0.01315068 e^x = 0.986936 100 × 0.986936 = $98.6936 105 - 98.6936 = $6.3064 $6.3064 × 1000 = $6,306.40. Answer B is the closest.
Why the wrong answers are tempting:- A) $5,000: This is the most common mistake. It's calculated as ($105 − $100) × 1,000. This calculation completely ignores the time value of money. The $100 is not paid today, so its face value cannot be subtracted from today's spot price.
- C) $4,934: This is the result of incorrectly discounting the price difference: ($105 − $100) × 1,000 × e^(−0.04 × (120/365)) = $5,000 × 0.9869 = $4,934.50. You must discount the payment, not the difference in prices.
Calculate Your CFA Level 1 Score & Study Hours by Domain
Adjust your practice scores across official CFA Level 1 blueprint domains to predict your pass probability and generate a domain-weighted study schedule.
How Did You Score?
Tally up your correct answers. More importantly, did you spot the traps?
- 3-4 Correct: You have a solid grasp of the fundamentals. Your next step is to build speed and precision. Use VoraPrep's adaptive question bank to drill your weak areas and turn that knowledge into points on exam day.
- 1-2 Correct: You're building a foundation, but there are some conceptual gaps. Go back to the curriculum and review the sections where you struggled. Use VoraPrep's interactive lessons to actively engage with the material and ask Vory, our 24/7 tutor, to explain anything that isn't clear.
- 0 Correct: This is a valuable data point. It tells you exactly where to focus your energy. Stop, go back to the very beginning of the Derivatives material, and build your understanding from the ground up. Do not try to memorize formulas without understanding the concepts first.
A low score with a plan is better than a high score with false confidence. Use this as a diagnostic to build your personalized study plan.
The Smartest Way to Practice for the Derivatives Section
Doing a handful of free questions is a good start, but it's not a complete strategy. You need a deep arsenal of practice problems to master the material.
This is where a complete course like VoraPrep becomes essential. We offer a comprehensive toolkit designed for busy professionals who need to study efficiently.
- Adaptive Question Bank: With over 2,500 practice questions, you get unlimited practice. Our platform identifies your weak areas and serves you more questions on those topics, which is the fastest way to improve.
- Detailed Rationales: Every question comes with a detailed explanation, just like the ones above, that teaches you the 'why' behind the answer and how to avoid common traps.
- Vory, Your 24/7 Personal Tutor: Stuck on a swap valuation at 11 PM? Ask Vory. Our tutor can provide step-by-step guidance on any question or concept, ensuring you never stay stuck.
- Complete Course Structure: VoraPrep is a full, interactive course. You get textbook-grade lessons, FSRS-powered flashcards, and 1:1 exam simulators. It's a modern, effective alternative to overpriced passive video-lecture bundles. You can see a direct comparison in our guide on how VoraPrep stacks up against traditional CFA providers.
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