CAIA LEVEL 1 ACTUAL EXAM SET 2025/2026 QUESTIONS
WITH ANSWERS TAGGED A+
✔✔Fama French - ✔✔empirical multifactor model based on three factors: market beta,
market capitalization (SMB), and book-to-market ratio (HML)
subsequently added the Carhart momentum factor (UMD)
✔✔cost of carry model of forward contract pricing - ✔✔cost of carry refers to the cost
involved with holding an asset until expiration of the forward contract and includes both
the cost of storing the asset and the opportunity costs associated with using capital to
purchase the asset
any difference between the spot and forward price is due to the cost of carry, which
causes the term structure of forward prices to have a slope (arbitrage ensures this)
the costs and benefits of direct ownership today versus derivatives ownership (in the
future via a forward) determines the arbitrage-free pricing relationships between
underlying assets and their associated forward contracts: costs of direct ownership
today (opportunity cost of capital and storage costs of a commodity) are added to the
spot price (because these are costs not borne by the investor when asset is purchased
forward) and benefits of direct ownership (dividends or convenience yield) are
subtracted from the spot price (because these are benefits not enjoyed by purchasing
asset forward)
✔✔term structure of forwards - ✔✔in a simple scenario with no interest costs and
dividends (r and d = 0) or if interest costs equal dividends (r = d) forward prices equal
spot prices and the term structure is flat
when interest rates exceed the dividend rate (r > d, or generally when costs of direct
ownership exceed the benefits) forward prices are greater than spot prices and the term
structure is upward sloping (referred to as contango)
when the dividend rate exceeds the interest rate (r < d, or generally when benefits of
direct ownership exceed costs) forward prices are lower than spot prices and the term
structure is downward sloping (referred to as backwardation)
✔✔single option strategy payoffs - ✔✔long call: unlimited upside, limited downside
(premium paid)
short call: limited upside (premium earned), unlimited downside
long put: limited upside (difference between strike and 0), limited downside (premium
paid)
,short put: limited upside (premium earned), limited downside (difference between strike
and 0)
covered call: long underlying security, short call option; obligation to deliver covered by
long security, limited upside, limited downside --> similar payoff to short put
protective put: long underlying security and long put option; unlimited upside, limited
downside --> similary payoff to long call
✔✔strategies with two option positions - ✔✔option spreads involve both long and short
positions in either call or puts (but not both)
vertical spreads utilize both long and short positions in either two calls or two puts, with
each option differing in strike price:
1) bull spread combines a long position in a lower strike price call option with a short
position in a higher strike price call option, creating bullish exposure bounded by the two
strike prices; result is a capped gain from underlying increasing in price
2) bearish spread combines a long position in a higher strike price put option with a
short position in a lower strike price put option, creating a bearish exposure bounded by
the two strike prices; result is capped gain from underlying falling in price
option combinations involve positions in both calls and puts; they are known as volatility
strategies as the investor anticipates large swings in a security's price but does now
know the direction
1) option straddle is a position in a call and a put (either both long or both short) with the
same expiration date and strike price (v payoff shape)
2) option strangle is a position in a call and a put (either both long or short) with the
same expiration date BUT different strike prices (hitched U payoff shape)
3) an option straddle with different signs e.g long call and short put, creates a synthetic
long position in the underlying position with a straight line payoff; long put and short call
would result in a synthetic short position
4) a risk reversal is an option strangle with different signs and is similar to a synthetic
long position (straddle with different sign options) except the options have different
strike prices, creating a break in the payoff line
5) a collar includes a long position in the underlying, a long position in a put, and a short
position in a call --> investor expects minimum v
✔✔put-call parity - ✔✔a no arbitrage relationship between two sets of positions with
identical payoffs: owning a risky underlying asset (e.g. stock) versus being long a call
and a risk-free bond and being short a put:
call + risk-free bond - put = underlying risky asset
the call and put both have identical strike prices and expiration dates
, the risk-free bond indicates the initial cash investment and the risk-free rate that
investment must earn, upside exposure is provided by the long call and downside risk is
provided by the short put
it is possible to value a firm's capital structure using a structural model based on put-call
parity: we assume the assets of the firm are the underlying, the strike price is the face
value of debt, and the expiration date of the option is the debt's maturity; the value of
equity (residual stake after debt is paid) is the value of the call option on the underlying
i.e. the firm's assets:
firm's debt = assets - call = risk-free bond - put
firm's equity = call = assets + put - risk-free bond
i) firm's risky debt valued via call option view of capital structure: risky debt is equivalent
to short a call and long the asset i.e. covered call
ii) firm's risky debt valued via put option view of capital structure i.e. Merton's structural
model: risky debt is equivalent to owning risk-free debt and writing a put option on the
firm's assets, the premium of which is based on the riskiness of those assets
put-call parity can be used to create a riskless cash flow i.e. a hedge inf the form of a
riskless bond: the result is a riskless cash flow equal to the strike price at expiration
(option strike prices and expiration dates must be equal)
✔✔option Greeks - ✔✔delta - sensitivity of the option price to changes in the price of
the underlying security
gamma - sensitivity of the option price to changes in the rate of delta (second derivative)
vega - measures the sensitivity of the option price to changes in the price volatility of the
underlying
theta - measures the sensitivity of the option price to changes in the time to expiration
(passage of time)
rho - measures sensitivity of the option price to changes in the risk-free rate
✔✔types of asset pricing models - ✔✔normative models explain how investors should
behave e.g. Markowitz, positive models explain how investors actually behave
theoretical models are based on logic that captures behavior vs. empirical models which
are based on historical observations
WITH ANSWERS TAGGED A+
✔✔Fama French - ✔✔empirical multifactor model based on three factors: market beta,
market capitalization (SMB), and book-to-market ratio (HML)
subsequently added the Carhart momentum factor (UMD)
✔✔cost of carry model of forward contract pricing - ✔✔cost of carry refers to the cost
involved with holding an asset until expiration of the forward contract and includes both
the cost of storing the asset and the opportunity costs associated with using capital to
purchase the asset
any difference between the spot and forward price is due to the cost of carry, which
causes the term structure of forward prices to have a slope (arbitrage ensures this)
the costs and benefits of direct ownership today versus derivatives ownership (in the
future via a forward) determines the arbitrage-free pricing relationships between
underlying assets and their associated forward contracts: costs of direct ownership
today (opportunity cost of capital and storage costs of a commodity) are added to the
spot price (because these are costs not borne by the investor when asset is purchased
forward) and benefits of direct ownership (dividends or convenience yield) are
subtracted from the spot price (because these are benefits not enjoyed by purchasing
asset forward)
✔✔term structure of forwards - ✔✔in a simple scenario with no interest costs and
dividends (r and d = 0) or if interest costs equal dividends (r = d) forward prices equal
spot prices and the term structure is flat
when interest rates exceed the dividend rate (r > d, or generally when costs of direct
ownership exceed the benefits) forward prices are greater than spot prices and the term
structure is upward sloping (referred to as contango)
when the dividend rate exceeds the interest rate (r < d, or generally when benefits of
direct ownership exceed costs) forward prices are lower than spot prices and the term
structure is downward sloping (referred to as backwardation)
✔✔single option strategy payoffs - ✔✔long call: unlimited upside, limited downside
(premium paid)
short call: limited upside (premium earned), unlimited downside
long put: limited upside (difference between strike and 0), limited downside (premium
paid)
,short put: limited upside (premium earned), limited downside (difference between strike
and 0)
covered call: long underlying security, short call option; obligation to deliver covered by
long security, limited upside, limited downside --> similar payoff to short put
protective put: long underlying security and long put option; unlimited upside, limited
downside --> similary payoff to long call
✔✔strategies with two option positions - ✔✔option spreads involve both long and short
positions in either call or puts (but not both)
vertical spreads utilize both long and short positions in either two calls or two puts, with
each option differing in strike price:
1) bull spread combines a long position in a lower strike price call option with a short
position in a higher strike price call option, creating bullish exposure bounded by the two
strike prices; result is a capped gain from underlying increasing in price
2) bearish spread combines a long position in a higher strike price put option with a
short position in a lower strike price put option, creating a bearish exposure bounded by
the two strike prices; result is capped gain from underlying falling in price
option combinations involve positions in both calls and puts; they are known as volatility
strategies as the investor anticipates large swings in a security's price but does now
know the direction
1) option straddle is a position in a call and a put (either both long or both short) with the
same expiration date and strike price (v payoff shape)
2) option strangle is a position in a call and a put (either both long or short) with the
same expiration date BUT different strike prices (hitched U payoff shape)
3) an option straddle with different signs e.g long call and short put, creates a synthetic
long position in the underlying position with a straight line payoff; long put and short call
would result in a synthetic short position
4) a risk reversal is an option strangle with different signs and is similar to a synthetic
long position (straddle with different sign options) except the options have different
strike prices, creating a break in the payoff line
5) a collar includes a long position in the underlying, a long position in a put, and a short
position in a call --> investor expects minimum v
✔✔put-call parity - ✔✔a no arbitrage relationship between two sets of positions with
identical payoffs: owning a risky underlying asset (e.g. stock) versus being long a call
and a risk-free bond and being short a put:
call + risk-free bond - put = underlying risky asset
the call and put both have identical strike prices and expiration dates
, the risk-free bond indicates the initial cash investment and the risk-free rate that
investment must earn, upside exposure is provided by the long call and downside risk is
provided by the short put
it is possible to value a firm's capital structure using a structural model based on put-call
parity: we assume the assets of the firm are the underlying, the strike price is the face
value of debt, and the expiration date of the option is the debt's maturity; the value of
equity (residual stake after debt is paid) is the value of the call option on the underlying
i.e. the firm's assets:
firm's debt = assets - call = risk-free bond - put
firm's equity = call = assets + put - risk-free bond
i) firm's risky debt valued via call option view of capital structure: risky debt is equivalent
to short a call and long the asset i.e. covered call
ii) firm's risky debt valued via put option view of capital structure i.e. Merton's structural
model: risky debt is equivalent to owning risk-free debt and writing a put option on the
firm's assets, the premium of which is based on the riskiness of those assets
put-call parity can be used to create a riskless cash flow i.e. a hedge inf the form of a
riskless bond: the result is a riskless cash flow equal to the strike price at expiration
(option strike prices and expiration dates must be equal)
✔✔option Greeks - ✔✔delta - sensitivity of the option price to changes in the price of
the underlying security
gamma - sensitivity of the option price to changes in the rate of delta (second derivative)
vega - measures the sensitivity of the option price to changes in the price volatility of the
underlying
theta - measures the sensitivity of the option price to changes in the time to expiration
(passage of time)
rho - measures sensitivity of the option price to changes in the risk-free rate
✔✔types of asset pricing models - ✔✔normative models explain how investors should
behave e.g. Markowitz, positive models explain how investors actually behave
theoretical models are based on logic that captures behavior vs. empirical models which
are based on historical observations
