AAFM Financial Derivatives and Alternative Investments 2

Question 1

Which options strategy combines a long call and a short call at a higher strike to limit both potential gain and cost?

Accepted Answer

Bull call spread

Answer

A bull call spread buys a call at a lower strike and sells a call at a higher strike with the same expiration, limiting the maximum gain to the spread width while reducing the net premium cost.

Question 2

Implied volatility derived from market option prices reflects which market sentiment measure?

Accepted Answer

The market's consensus forecast of future price variability

Answer

Implied volatility is backed out from observed option prices using a pricing model; it reflects the market's collective expectation of how volatile the underlying asset will be over the option's remaining life.

Question 3

A commodity futures contract traded on an exchange differs from an over-the-counter forward in that it is which of the following?

Accepted Answer

Standardized and centrally cleared

Answer

Exchange-traded futures are standardized contracts with fixed contract sizes, expiration dates, and delivery specifications, cleared through a central counterparty to eliminate default risk.

Question 4

Which alternative investment category includes timberland, farmland, infrastructure, and real assets that provide inflation-linked returns?

Accepted Answer

Real assets

Answer

Real assets—including infrastructure, farmland, timberland, and natural resources—provide physical, tangible value and tend to have returns correlated with inflation, offering diversification benefits.

Question 5

The J-curve in private equity describes which pattern of fund cash flows during the early years of a fund's life?

Accepted Answer

Negative returns early (fees and investments) followed by positive returns as exits materialize

Answer

Private equity funds typically show negative net returns in early years due to management fees, unrealized investments, and capital drawdowns, then generate positive returns as portfolio companies are sold—forming a J-shaped curve.

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM Financial Derivatives and Alternative Investments 2