AAFM Financial Derivatives and Alternative Investments

Question 1

A call option gives the holder the right, but not the obligation, to do which of the following?

Accepted Answer

Buy the underlying asset at the strike price

Answer

A call option grants the buyer the right to purchase the underlying asset at the agreed strike price before or on the expiration date, regardless of the current market price.

Question 2

In options pricing, the Black-Scholes model uses which five inputs to determine the theoretical value of a European option?

Accepted Answer

Stock price, strike price, risk-free rate, time to expiration, and volatility

Answer

The Black-Scholes model requires the current stock price, option strike price, risk-free interest rate, time to expiration, and the underlying asset's volatility to compute a European option's fair value.

Question 3

A futures contract obligates both parties to transact an asset at a predetermined price on a specified future date, unlike which related instrument?

Accepted Answer

Options contract

Answer

Unlike futures, options give the buyer the right but not the obligation to transact, while futures require both the long and short parties to fulfill the contract at maturity.

Question 4

Which risk measure in options, delta, represents the sensitivity of an option's price to a change of what?

Accepted Answer

The underlying asset's price

Answer

Delta measures how much an option's price changes for a $1 change in the price of the underlying asset, ranging from 0 to 1 for calls and -1 to 0 for puts.

Question 5

A hedge fund strategy that profits from pricing discrepancies between related securities, regardless of market direction, is classified as which type?

Accepted Answer

Market neutral/arbitrage

Answer

Market-neutral and arbitrage strategies seek to profit from relative mispricings between related instruments while hedging out directional market risk, producing returns uncorrelated with broad markets.

American Academy of Financial Management (AAFM) Practice Test

American Academy of Financial Management (AAFM) Practice Test

AAFM Financial Derivatives and Alternative Investments