Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives practice questions

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives is part of CFA Level I Derivatives. Derivatives questions cover forwards, futures, swaps, options, replication logic, payoffs, and risk-transfer mechanics. Use this page to review the controlling ideas, then work through 7 questions with answer explanations and common traps.

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What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

Easy

Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

Two portfolios are certain to produce identical cash flows on the same future dates in every possible state of the world, yet they currently trade at different prices. According to the law of one price, this situation is best described as:

Moderate

Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

An investor buys a non-dividend-paying asset at the spot price and simultaneously sells a forward contract on that asset at the no-arbitrage forward price, holding both positions until the forward expires. The return earned on this combined position is most likely:

Moderate

Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

The spot price of a storable commodity currently exceeds its forward price for delivery in one year, and the risk-free rate is positive. This relationship is most likely explained by:

Moderate

Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

The spot price of a storable industrial metal is USD 40.00 per unit. Storage and insurance costs of USD 2.00 per unit are payable at the end of one year, the annual risk-free rate is 5.0% with annual compounding, and holding the metal provides no convenience yield or other benefits. The no-arbitrage price of a one-year forward contract on the metal is closest to:

Moderate

Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

A stock trades at USD 75.00 and will pay a single dividend of USD 1.50 immediately before the expiration of a one-year forward contract on the stock. The annual risk-free rate is 4.0% with annual compounding. The no-arbitrage one-year forward price is closest to:

Difficult

Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

A metals analyst prices a one-year forward contract on a commodity with a spot price of USD 1,200.00 per unit. The annual risk-free rate is 3.0% with annual compounding. Storage costs with a value of USD 24.00 as of expiration will be incurred, and the convenience yield of holding the physical commodity has a value of USD 10.00 as of expiration. The no-arbitrage one-year forward price is closest to:

Difficult

Derivatives

Arbitrage, Replication, and the Cost of Carry in Pricing Derivatives

A non-dividend-paying asset trades at a spot price of USD 60.00, and the annual risk-free rate is 6.0% with annual compounding. A dealer quotes a one-year forward price of USD 65.00 on the asset. An arbitrageur borrows the full purchase price at the risk-free rate, buys the asset at spot, and sells the forward at the quoted price, holding the position to expiration. The arbitrage profit at expiration, per unit of the asset, is closest to: