CFA Derivatives and Risk Management 3

Question 1

Vega (ν) measures an option's sensitivity to changes in:

Accepted Answer

Implied volatility of the underlying asset

Answer

The underlying asset's price

Answer

The risk-free interest rate

Answer

The time remaining to expiration

Question 2

Which of the following is an example of basis risk in a hedging strategy?

Accepted Answer

Using a futures contract whose underlying does not perfectly match the asset being hedged, causing imperfect hedge performance

Answer

A mismatch between the hedge's notional amount and the portfolio's value

Answer

The risk that the counterparty to a hedge defaults

Answer

The risk that regulatory changes make the hedge illegal

Question 3

A bull call spread is constructed by:

Accepted Answer

Buying a call at a lower strike and selling a call at a higher strike

Answer

Buying a call and selling a put at the same strike

Answer

Buying two calls at different strikes and selling the underlying

Answer

Selling a call at a lower strike and buying a call at a higher strike

Question 4

In the Black-Scholes-Merton model, an increase in which of the following inputs increases call option value?

Accepted Answer

Increase in time to expiration

Answer

Increase in the strike price

Answer

Decrease in underlying stock price

Answer

Decrease in risk-free rate

Question 5

Which of the following is NOT a characteristic of exchange-traded derivatives?

Accepted Answer

Fully customizable terms to meet counterparty needs

Answer

Standardized contract terms

Answer

Centralized clearing through a clearinghouse

Answer

Daily mark-to-market with margin calls

Question 6

Enterprise Risk Management (ERM) differs from traditional risk management by:

Accepted Answer

Integrating all categories of risk (financial, operational, strategic, reputational) into a unified firm-wide framework

Answer

Focusing only on financial market risks such as interest rate and credit risk

Answer

Delegating risk management to individual business units independently

Answer

Prioritizing compliance risk above all other risk categories