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Free Questions › CFA › Derivatives
Free CFA Derivatives Practice Questions & Answers
500 exam-style Derivatives questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 241
Which of the following is unique to futures contracts compared to forward contracts?
Select an option first.
Correct answer: B — Daily mark-to-market with variation margin settlements
Explanation: ✔ Why correct: Daily mark-to-market is the defining operational feature of futures. Gains and losses are credited or debited to margin accounts each trading day. ✘ Why others are wrong: A applies to both. C is a feature of forwards, not futures. D is greatly reduced in futures due to the clearinghouse but not unique.
Question 242
Contango in a futures market means:
Select an option first.
Correct answer: B — The futures price is above the current spot price
Explanation: ✔ Why correct: Contango is a condition in which futures prices exceed the current spot price, typically because of positive cost of carry (storage and financing costs). ✘ Why others are wrong: A is backward. C describes backwardation. D means neither contango nor backwardation.
Question 243
Backwardation occurs when:
Select an option first.
Correct answer: C — Futures prices are below the current spot price
Explanation: ✔ Why correct: Backwardation means futures prices are lower than the spot price. This often occurs when there is a strong demand for immediate delivery of the physical commodity. ✘ Why others are wrong: A and B describe contango. D is unrelated to the price relationship.
Question 244
The convenience yield is most relevant in explaining:
Select an option first.
Correct answer: B — Why commodity futures can trade at a discount to spot (backwardation)
Explanation: ✔ Why correct: Convenience yield represents the benefit of holding the physical commodity (e.g., ability to use it immediately). A high convenience yield can outweigh carry costs, pushing futures below spot (backwardation). ✘ Why others are wrong: A relates to covered interest parity. C is the dividend adjustment to equity forwards. D addresses bond futures delivery mechanics.
Question 245
A futures contract specifies all of the following EXCEPT:
Select an option first.
Correct answer: C — The exact counterparty with whom you are trading
Explanation: ✔ Why correct: Exchange-traded futures are anonymous. The clearinghouse inserts itself as the counterparty; traders do not know or choose their specific counterparty. ✘ Why others are wrong: A, B, and D are all standard specifications in a futures contract.
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Question 246
A trader who is long 10 gold futures and wants to close the position before delivery should:
Select an option first.
Correct answer: B — Enter 10 short gold futures contracts of the same expiry
Explanation: ✔ Why correct: An offsetting (opposing) trade in the same contract cancels the net position. Long 10 + short 10 = zero net position, and the clearinghouse removes the obligation. ✘ Why others are wrong: A would lead to physical delivery. C is not possible. D is not how clearinghouses operate.
Question 247
The delivery option in commodity futures gives the SHORT the right to choose:
Select an option first.
Correct answer: A — The timing, location, and sometimes quality of delivery within exchange rules
Explanation: ✔ Why correct: Many commodity futures allow the short some flexibility in choosing the exact delivery date, warehouse location, and eligible grade, within the bounds set by the exchange. ✘ Why others are wrong: B overstates the option. C is wrong; price is fixed by the futures contract. D applies to any holder.
Question 248
The cheapest-to-deliver (CTD) bond in Treasury bond futures is:
Select an option first.
Correct answer: B — The eligible bond that minimizes the cost to the short after adjusting for the conversion factor
Explanation: ✔ Why correct: Short sellers in T-bond futures choose which eligible bond to deliver. They select the one that is cheapest after dividing the futures price by the conversion factor. ✘ Why others are wrong: A is too simplistic. C is not the definition of CTD. D is not always correct.
Question 249
A conversion factor in Treasury bond futures is used to:
Select an option first.
Correct answer: B — Adjust the invoice price when a bond other than the benchmark is delivered
Explanation: ✔ Why correct: The conversion factor standardizes the price of each eligible bond relative to a 6% coupon baseline, allowing the short to deliver any eligible bond at a fair-value-adjusted price. ✘ Why others are wrong: A, C, and D describe different functions unrelated to conversion factors.
Question 250
The settlement price in a futures contract is best described as:
Select an option first.
Correct answer: B — A representative end-of-day price used by the exchange for daily mark-to-market
Explanation: ✔ Why correct: Exchanges calculate an official settlement price (often a volume-weighted average of closing trades) to ensure consistent daily mark-to-market across all accounts. ✘ Why others are wrong: A may not equal the settlement price. C is VWAP, which may differ. D is not standard practice.
Question 251
If a trader is long 5 crude oil futures at $70/barrel and the settlement price moves to $72, the change in the margin account is:
Select an option first.
Correct answer: C — $10,000 credit
Explanation: ✔ Why correct: Price change = $2/barrel. 5 contracts × 1,000 barrels × $2 = $10,000 gain credited to the long's margin account. ✘ Why others are wrong: A and B miscalculate the number of contracts. D would be a debit (loss), which occurs when prices fall for a long.
Question 252
Which of the following best explains why futures prices on a stock index are typically above the spot index level?
Select an option first.
Correct answer: B — The cost of financing the stocks exceeds the dividend income (positive carry)
Explanation: ✔ Why correct: Index futures are priced as F = S(1+r)^T − FV(dividends). When financing cost exceeds dividends, F > S, and the market is in contango. ✘ Why others are wrong: A confuses futures with options (which have time value). C is an oversimplification. D is incorrect.
Question 253
A hedger who is short commodity futures but does not make delivery at expiration will most likely:
Select an option first.
Correct answer: B — Close the futures position and transact in the spot market separately
Explanation: ✔ Why correct: Most hedgers close futures near expiration and execute their physical transaction in the spot market. Rolling forward is a choice, not automatic. ✘ Why others are wrong: A is incorrect; margin is returned upon closing. C does not apply for standard contract closure. D requires an active decision by the trader.
Question 254
The concept of rolling a futures position means:
Select an option first.
Correct answer: B — Closing the expiring contract and simultaneously opening a new contract in a later expiry month
Explanation: ✔ Why correct: Rolling maintains a continuous futures exposure by offsetting the near-month contract and entering the next-month contract before expiration. ✘ Why others are wrong: A is the opposite of rolling. C is a strategy change, not rolling. D describes pyramiding.
Question 255
The spot-futures parity relationship for equity index futures is violated when:
Select an option first.
Correct answer: B — The futures price is significantly above or below the fair value, allowing risk-free profits
Explanation: ✔ Why correct: Spot-futures parity is the no-arbitrage condition. If futures deviate materially from fair value, cash-and-carry or reverse cash-and-carry arbitrage profits are available. ✘ Why others are wrong: A describes fair value exactly. C is a special case with no violation. D is an unrelated metric.
Question 256
A cash-and-carry arbitrage in futures involves:
Select an option first.
Correct answer: B — Buying the underlying asset, financing it, and selling the overpriced futures contract
Explanation: ✔ Why correct: When futures are overpriced relative to fair value, the arbitrageur buys the cheap spot asset, funds the purchase, and sells the expensive futures, locking in a riskless profit. ✘ Why others are wrong: A is reverse cash-and-carry. C and D do not create a riskless return.
Question 257
In a normal (non-inverted) futures market for commodities, the futures price for a contract expiring later is typically:
Select an option first.
Correct answer: C — Higher than a nearer-term futures price due to the additional carry costs
Explanation: ✔ Why correct: In a normal (contango) market, additional time means additional storage, insurance, and financing costs. Each successive delivery month is priced higher. ✘ Why others are wrong: A describes an inverted or backwardation market. B would imply zero carry cost. D ignores cost of carry.
Question 258
A futures trader's long position is marked to market daily. Over 3 days, the settlement prices change as follows: +$2, −$1, +$3. The total variation margin received (net) is:
Select an option first.
Correct answer: C — $4
Explanation: ✔ Why correct: Net change = +2 − 1 + 3 = +$4 per unit. The trader received a net $4 in daily settlements. ✘ Why others are wrong: A sums incorrectly. B only sums positive days. D adds rather than nets.
Question 259
The primary reason most futures contracts are closed before delivery rather than settled physically is:
Select an option first.
Correct answer: B — Hedgers and speculators prefer cash flows to physical asset delivery
Explanation: ✔ Why correct: Most futures participants (speculators, financial hedgers) have no interest in physical delivery. They close positions to realize gains/losses or remove exposure. ✘ Why others are wrong: A is incorrect; physical delivery is allowed and required in many commodity contracts. C is nonsensical. D is not a general rule.
Question 260
A speculator shorts 3 S&P 500 futures contracts at 4,500. Each point equals $250. If the index falls to 4,440, the total profit is:
Select an option first.
Correct answer: B — $45,000
Explanation: ✔ Why correct: Price move = 4,500 − 4,440 = 60 points. Profit = 60 × $250 × 3 contracts = $45,000. ✘ Why others are wrong: A uses 2 contracts or wrong multiplier. C uses wrong multiplier. D divides incorrectly.
Question 261
Which of the following describes the concept of 'price limit' in futures trading?
Select an option first.
Correct answer: B — The maximum daily price movement allowed by the exchange before trading is halted
Explanation: ✔ Why correct: Exchanges impose daily price limits (circuit breakers) to prevent excessive volatility. When the limit is hit, trading may be halted or restricted. ✘ Why others are wrong: A is not a rule. C describes an option strike. D describes contract size.
Question 262
Open interest rises when:
Select an option first.
Correct answer: B — A new long and a new short enter into a contract together
Explanation: ✔ Why correct: Open interest increases only when a new contract is created — a new long paired with a new short. Transfers between holders or closings do not change open interest. ✘ Why others are wrong: A transfers the long without creating a new contract. C reduces open interest. D is a price/volume comparison, not an open interest rule.
Question 263
The 'tail' of a hedge refers to:
Select an option first.
Correct answer: B — The adjustment to the number of futures contracts to account for daily mark-to-market
Explanation: ✔ Why correct: Because futures are marked to market daily and forwards are not, a hedger who replicates a forward with futures must account for the time value of interim cash flows — this adjustment is called 'tailing the hedge'. ✘ Why others are wrong: A is basis risk. C is the delivery. D is not a standard term.
Question 264
A long futures position is equivalent to a leveraged investment in the underlying because:
Select an option first.
Correct answer: B — The full notional exposure is controlled with only a margin deposit
Explanation: ✔ Why correct: A small margin deposit controls a large notional amount. A 5% margin means the trader has 20:1 leverage — gains and losses are magnified relative to capital deployed. ✘ Why others are wrong: A is wrong; margin is required. C is not automatic. D is incorrect.
Question 265
The invoice price received by a short who delivers in a Treasury bond futures contract equals:
Select an option first.
Correct answer: B — The futures settlement price times the conversion factor plus accrued interest
Explanation: ✔ Why correct: Invoice price = futures price × conversion factor + accrued interest. The conversion factor adjusts for the specific bond's characteristics relative to the standardized benchmark. ✘ Why others are wrong: A ignores the conversion factor and accrued interest. C is market value (usually different). D is the original price, not the invoice price.
Question 266
Eurodollar futures (or SOFR futures) are primarily used to hedge against:
Select an option first.
Correct answer: B — Short-term interest rate movements
Explanation: ✔ Why correct: Short-term interest rate futures (Eurodollar/SOFR) allow banks, corporations, and investors to hedge or speculate on near-term floating interest rates. ✘ Why others are wrong: A is equity derivatives. C describes currency futures. D is commodity derivatives.
Question 267
If the carry cost of a commodity is high (expensive to store), the futures market for that commodity is most likely in:
Select an option first.
Correct answer: B — Contango
Explanation: ✔ Why correct: High carry costs (storage, insurance, financing) push deferred futures prices above near-term prices — the hallmark of contango. ✘ Why others are wrong: A occurs when convenience yield or supply scarcity dominates. C is unrealistic. D is not a standard market state.
Question 268
Which futures contract would a fund manager most likely use to quickly increase equity market exposure without purchasing stocks?
Select an option first.
Correct answer: C — Equity index futures
Explanation: ✔ Why correct: Long equity index futures provide immediate, leveraged exposure to a broad market without transacting in the underlying stocks. ✘ Why others are wrong: A, B, and D target different underlyings.
Question 269
The number of futures contracts needed to fully hedge a portfolio (the hedge ratio) depends primarily on:
Select an option first.
Correct answer: B — The portfolio value, the futures price, the multiplier, and the relative volatility/beta of the portfolio
Explanation: ✔ Why correct: Optimal hedge ratio = (Portfolio value × beta or duration) / (Futures price × multiplier). Beta (for equity) or duration (for bonds) aligns the sensitivity of the hedge to the portfolio. ✘ Why others are wrong: A ignores beta and multiplier. C is not a determinant of hedge ratio. D is a cost consideration.
Question 270
A commodity producer (natural short) who sells futures to lock in the output price is engaging in:
Select an option first.
Correct answer: C — A short hedge
Explanation: ✔ Why correct: A short hedge involves taking a short futures position to protect against a decline in the price of an asset already owned or to be produced. ✘ Why others are wrong: A implies no underlying production risk. B requires simultaneous spot and futures positions for arbitrage. D is a specific trade exploiting the spread between spot and futures. Swaps
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