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Financial Derivatives and Alternative Investments Flashcards

6 cards from real AAFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. Vega, one of the option Greeks, measures an option's price sensitivity to a change in which variable?

    Answer: Implied volatility

    Vega measures how much an option's theoretical value changes for a 1% change in implied volatility, with both calls and puts having positive vega (benefiting from higher volatility).

  2. Which structured product provides investors with capital protection plus participation in market upside, typically with a note linked to an equity index?

    Answer: Principal-protected note

    A principal-protected note (PPN) guarantees return of the invested principal at maturity while offering partial or full participation in the performance of a reference index or asset.

  3. Real estate investment trusts (REITs) must distribute at least what percentage of taxable income to shareholders to maintain their tax-exempt status at the entity level?

    Answer: 90%

    REITs are required to distribute at least 90% of their taxable income to shareholders annually, which qualifies them for a deduction for dividends paid and avoids corporate-level income tax.

  4. Which risk in derivatives refers to the possibility that a counterparty will fail to fulfill its contractual obligation?

    Answer: Counterparty (credit) risk

    Counterparty risk (also called credit risk in derivatives) is the risk that the party on the other side of a derivatives contract will default on its obligations, particularly relevant in OTC markets.

  5. A credit default swap (CDS) allows one party to transfer which specific risk to another party in exchange for periodic payments?

    Answer: Credit/default risk on a reference entity

    A CDS is a financial contract in which the protection buyer pays regular premiums to the protection seller, who agrees to compensate the buyer if a specified credit event (such as default) occurs on the reference entity.

  6. Which hedge fund strategy focuses exclusively on corporate events such as mergers, spin-offs, and bankruptcies to generate returns?

    Answer: Event-driven

    Event-driven strategies profit from pricing inefficiencies that arise around corporate events such as mergers and acquisitions, restructurings, spin-offs, and earnings surprises.