Derivatives and Risk Management Flashcards
6 cards from real CFA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 Derivatives and Risk Management flashcards as text
A European call option gives the holder the right to:
Answer: Buy the underlying asset at the strike price only at expiration
A European call option grants the right (not obligation) to buy the underlying at the strike price, but only on the expiration date, not before.
Put-call parity states that for European options, the relationship is:
Answer: Call price + Strike price (PV) = Put price + Current stock price
Put-call parity: C + PV(X) = P + S, where C = call price, PV(X) = present value of strike, P = put price, S = current stock price.
Which of the following is the MAIN difference between a forward contract and a futures contract?
Answer: Futures are marked-to-market daily with margin requirements; forwards are settled at expiration
Futures are exchange-traded with daily mark-to-market and margin requirements, while forwards are OTC contracts settled at maturity without daily settlement.
Delta (Δ) of an option measures:
Answer: The rate of change of option price with respect to a $1 change in the underlying asset price
Delta measures how much the option's price changes for a $1 move in the underlying asset; it ranges from 0 to 1 for calls and –1 to 0 for puts.
A portfolio manager wants to hedge against a decline in a stock portfolio using put options. The strategy is BEST described as:
Answer: A protective put
A protective put involves holding the stock (long) and buying put options to limit downside losses while retaining upside potential.
In a plain vanilla interest rate swap, the fixed-rate payer benefits when:
Answer: Interest rates rise above the fixed rate agreed upon
The fixed-rate payer benefits when floating rates rise above the fixed rate, because they receive more floating payments while their fixed payment remains constant.