AIP Alternative Investments & Derivatives Flashcards

Which of the following best describes a hedge fund's use of leverage?

Answer: Leverage allows hedge funds to borrow capital to amplify potential returns

Hedge funds use leverage by borrowing capital to increase their position size, which can amplify both gains and losses.

A call option gives the buyer the right to:

Answer: Purchase the underlying asset at the strike price before expiration

A call option grants the holder the right, but not the obligation, to buy the underlying asset at the predetermined strike price before or on expiration.

What is a primary characteristic of private equity investments?

Answer: Long lock-up periods and limited liquidity

Private equity investments typically require investors to commit capital for extended periods, often 7–10 years, with limited ability to exit early.

In futures trading, 'marking to market' refers to:

Answer: Daily settlement of gains and losses in a futures account

Marking to market means futures positions are revalued daily, with gains credited and losses debited from the trader's margin account each trading day.

A swap agreement in which one party pays a fixed interest rate and receives a floating rate is called a:

Answer: Plain vanilla interest rate swap

A plain vanilla interest rate swap involves one counterparty paying a fixed rate while receiving a variable (floating) rate, typically tied to LIBOR or SOFR.

Which statement about real estate investment trusts (REITs) is correct?

Answer: REITs must distribute at least 90% of taxable income to shareholders

To qualify for special tax treatment, REITs are required by law to distribute at least 90% of their taxable income to shareholders as dividends.