CFA Derivatives and Risk Management 2

Question 1

Value at Risk (VaR) at a 95% confidence level and a 1-day horizon means:

Accepted Answer

The portfolio will lose more than the VaR amount 5 days out of every 100

Answer

The portfolio will never lose more than the VaR amount

Answer

The expected loss over one day is exactly equal to VaR

Answer

VaR equals 95% of the maximum possible daily loss

Question 2

Conditional VaR (CVaR), also called Expected Shortfall, improves on VaR because it measures:

Accepted Answer

The expected loss given that the loss exceeds the VaR threshold

Answer

The maximum possible loss with certainty

Answer

The loss at exactly the VaR confidence level

Answer

The loss from systematic risk only

Question 3

Which of the following best describes a credit default swap (CDS)?

Accepted Answer

A derivative where the protection buyer pays periodic premiums in exchange for a payment if a credit event occurs

Answer

An exchange-traded contract to buy or sell bonds at a fixed price

Answer

A structured product that tranches credit risk into senior and junior claims

Answer

A forward contract to exchange floating for fixed interest payments

Question 4

Gamma (Γ) of an option is highest when:

Accepted Answer

The option is near-the-money and close to expiration

Answer

The option is deep in-the-money with a long time to expiry

Answer

The option is deep out-of-the-money with volatility rising

Answer

The underlying asset pays a high dividend yield

Question 5

Which risk management strategy is MOST appropriate when a firm wants to eliminate the risk of an adverse price move but retain the potential to benefit from a favorable move?

Accepted Answer

Buy an option to hedge the downside while retaining upside

Answer

Short a futures contract on the exposure

Answer

Enter a forward contract to lock in a fixed price

Answer

Sell an option to collect premium and offset losses

Question 6

A firm has a floating-rate loan and is concerned rates will rise. To manage this risk, the firm should:

Accepted Answer

Both B and C are appropriate strategies

Answer

Enter a receive-fixed, pay-floating interest rate swap

Answer

Enter a pay-fixed, receive-floating interest rate swap

Answer

Buy a cap on interest rates