CFA Level III Questions

• According to the CFA Institute, Level III pass rates are at around 39%.
• The CFA Level III exam format consists of a combination of item set questions and constructed response or essay questions.
• The most heavily weighted topic areas on the Level III exam are Portfolio Management and Wealth Planning.
• The exam is split into a morning session and an afternoon session.
• With a wide variety of practice questions and mock exams, Wiley covers all of your CFA exam prep needs to help you pass on your first attempt.

The Level III CFA exam is broken down into two sessions including a morning session where CFA candidates will be faced with 8 to 11 vignettes followed by several written response questions.

You’ll find some multiple-choice questions during this session as well, some of which are followed by an essay question where you will be asked to justify your response.

The second session of the CFA Level III exam consists of 44 multiple-choice item sets which are followed by a vignette with 4 or 6 multiple-choice-type questions. You’ll be asked to answer based on the information in the vignette as opposed to the free-standing answer items you found on the Level I exam.

Use our Level III Test Bank to identify your strengths and weaknesses and check that you can apply what you have learned with 110 multiple choice questions and approximately 75 constructed response questions that are close to those you will see on exam day.

At each level in the CFA Program, Ethics is an important topic area. On the Level III exam, Ethics is paramount again and is an area that many struggle with the most leading up to their exam date. The topic represents 10-15% of the total exam weight and can be found in both constructed response questions as well as vignette-based multiple-choice questions.

The Level III Ethics questions are more complex than Level I or Level II, testing your ability to evaluate and explain how a stance does or does not violate the Code and Standards. There’s also an added weight on GIPS (Global Investment Performance Standards) and a new section on Asset Manager Code of Professional Conduct.

Learn more about CFA Level III topic weights.

The NZDUSD exchange rate is currently trading at USD 0.7109 per NZD and has been trending upward over the past three weeks from its recent low of 0.6892. Interest rates in New Zealand across the yield curve are roughly 1% p.a. higher than those in the United States.

Three friends who work on the proprietary trading desks of separate banks in New Zealand have been discussing NZD movement. The traders’ statements appear in Exhibit 1.

Exhibit 1: NZDUSD Currency Expectations

Trader	Comment
Amy-Lee	“With the RBNZ meeting tomorrow, I’m expecting currency fluctuations to jump over the next few days. This represents a good opportunity, regardless of the direction of the exchange rate.”
Bree	“The currency has plenty of support at 71 cents and is not likely to have any short-term resistance until it gets back toward 75 cents. I’m going to trade forward contracts over the next few weeks to take advantage of this.”
Colin	“I’m really only interested in a play on the interest rate differential between the two countries. I think the currency stays flat for the next few months, and any appreciation will be a bonus.”

1. For each Trader in the first column, determine which strategy is likely to be utilized for the Currency Trading Strategy by selecting from the list provided. A selection may be used once, more than once, or not at all.
2. For each Trader in the first column, determine the most likely position that the trader will utilize for the Currency Position column by selecting from the list provided. A selection may be used once, more than once, or not at all.

Currency Trading Strategy

Amy-Lee

1. Carry trade
2. Fundamental trading
3. Technical trading
4. Volatility trading

Bree

1. Carry trade
2. Fundamental trading
3. Technical trading
4. Volatility trading

Colin

1. Carry trade
2. Fundamental trading
3. Technical trading
4. Volatility trading

Currency Position

Amy-Lee

1. Short NZD/Long USD forwards
2. Long NZD/Short USD forwards
3. Short NZDUSD call options
4. Long NZDUSD call and put options

Bree

1. Short NZD/Long USD forwards
2. Long NZD/Short USD forwards
3. Short NZDUSD call options
4. Long NZDUSD call and put options

Colin

1. Short NZD/Long USD forwards
2. Long NZD/Short USD forwards
3. Short NZDUSD call options
4. Long NZDUSD call and put options

Trader	Currency Trading Strategy	Currency Position
Amy-Lee	Volatility trading	Long NZDUSD call and put options
Bree	Technical trading	Long NZD/Short USD forwards
Colin	Carry trading	Long NZD/Short USD forwards

Amy-Lee

1. Amy-Lee is looking to profit from an increase in volatility of the exchange rate. This is volatility trading.
2. Amy-Lee could profit from increased volatility by purchasing a combination of NZDUSD options (puts and calls), the prices of which will increase as volatility increases.

Bree

1. Bree believes that the exchange rate can be forecasted using historical price movements. Bree is trading the currency using technical analysis.
2. Bree believes that the exchange rate will continue to go up and will enter a contract to capture NZD appreciation. The value of the short USD position will increase as USD depreciates.

Colin

1. Colin hopes to profit from the interest rate differential between New Zealand and the United States and would be taking advantage of the carry trade.
2. To take advantage of the forward discount on the NZD, Colin will go long NZD/shortUSD forwards. His breakeven will be if the spot price falls by the forward rate discount, but he will profit if the exchange rate stays above this level (i.e., only a small depreciation or any appreciation).

A. Answer and Explanation

Amy-Lee

1. Amy-Lee is looking to profit from an increase in volatility of the exchange rate. This is volatility trading.
2. Amy-Lee could profit from increased volatility by purchasing a combination of NZDUSD options (puts and calls), the prices of which will increase volatility increases.

Bree

1. Bree believes that the exchange rate can be forecasted using historical price movements. Bree is trading the currency using technical analysis.
2. Bree believes that the exchange rate will continue to go up and will enter a contract to capture NZD appreciation. The value of the short USD position will increase as USD depreciates.

Colin

1. Colin hopes to profit from the interest rate differential between New Zealand and the United States and would be taking advantage of the carry trade.
2. To take advantage of the forward discount on the NZD, Colin will go long NZD/shortUSD forwards. His breakeven will be if the spot price falls by the forward rate discount, but he will profit if the exchange rate stays above this level (i.e., only a small depreciation or any appreciation).