CDP CDP Portfolio Management & Analytics 1 — Questions and Answers
Question 1: What does 'Value at Risk' (VaR) measure in a derivatives portfolio?
- The maximum profit achievable from a portfolio
- The maximum loss a portfolio is expected to experience with a given confidence level over a specific period (Correct answer)
- The average daily return of a derivatives portfolio
- The total notional value of all derivatives positions
Correct answer: The maximum loss a portfolio is expected to experience with a given confidence level over a specific period
VaR estimates the maximum loss a portfolio is likely to suffer over a defined period at a specified confidence level (e.g., 95% or 99%), given normal market conditions.
Question 2: What is 'portfolio Greeks' analysis used for?
- Calculating historical performance metrics of a derivatives portfolio
- Measuring the aggregate sensitivities of a derivatives portfolio to various market factors (Correct answer)
- Evaluating counterparty credit risk across positions
- Determining the tax implications of derivatives transactions
Correct answer: Measuring the aggregate sensitivities of a derivatives portfolio to various market factors
Portfolio Greeks aggregates the individual delta, gamma, vega, theta, and rho of all positions to understand the portfolio's overall sensitivity to market changes.
Question 3: What is 'correlation risk' in a multi-asset derivatives portfolio?
- The risk that interest rates and bond prices move in the same direction
- The risk that assumed correlations between assets change, affecting portfolio performance (Correct answer)
- The risk that options expire worthless due to low volatility
- The risk of executing trades at unfavorable prices
Correct answer: The risk that assumed correlations between assets change, affecting portfolio performance
Correlation risk arises when the actual correlation between assets in a portfolio differs from assumed correlations, which can invalidate hedging strategies and affect portfolio value.
Question 4: What is the purpose of 'stress testing' a derivatives portfolio?
- To verify that trade execution systems function under high volume
- To evaluate how a portfolio performs under extreme but plausible market scenarios (Correct answer)
- To test the accuracy of derivatives pricing models
- To assess counterparty creditworthiness
Correct answer: To evaluate how a portfolio performs under extreme but plausible market scenarios
Stress testing subjects a derivatives portfolio to extreme market scenarios (e.g., large rate moves, volatility spikes) to identify potential vulnerabilities and losses beyond normal VaR estimates.
Question 5: What does 'net exposure' mean in derivatives portfolio management?
- The gross notional value of all derivatives positions
- The combined directional risk after offsetting long and short positions (Correct answer)
- The total premium paid for all options positions
- The maximum potential loss from a single position
Correct answer: The combined directional risk after offsetting long and short positions
Net exposure is the residual directional risk remaining after long and short positions offset each other, representing the actual market risk the portfolio bears.
Question 6: What is 'P&L attribution' in derivatives portfolio management?
- Distributing profits among traders on a derivatives desk
- Breaking down portfolio profit and loss into contributions from individual risk factors such as delta and vega (Correct answer)
- Allocating capital to various derivatives strategies
- Reporting derivatives gains to tax authorities
Correct answer: Breaking down portfolio profit and loss into contributions from individual risk factors such as delta and vega
P&L attribution decomposes portfolio performance into contributions from market factors such as delta (price moves), vega (volatility changes), and theta (time decay) to understand return drivers.
CDP CDP Portfolio Management & Analytics 1
What does 'Value at Risk' (VaR) measure in a derivatives portfolio?