CDP CDP Portfolio Management & Analytics 1

Question 1

What does 'Value at Risk' (VaR) measure in a derivatives portfolio?

Accepted Answer

The maximum loss a portfolio is expected to experience with a given confidence level over a specific period

Answer

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?

Accepted Answer

Measuring the aggregate sensitivities of a derivatives portfolio to various market factors

Answer

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?

Accepted Answer

The risk that assumed correlations between assets change, affecting portfolio performance

Answer

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?

Accepted Answer

To evaluate how a portfolio performs under extreme but plausible market scenarios

Answer

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?

Accepted Answer

The combined directional risk after offsetting long and short positions

Answer

Net exposure is the residual directional risk remaining after long and short positions offset each other, representing the actual market risk the portfolio bears.

CDP - Certified Derivatives Professional Practice Test

CDP - Certified Derivatives Professional Practice Test

CDP CDP Portfolio Management & Analytics 1