Derivatives & Alternative Investments Flashcards
7 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 7 Derivatives & Alternative Investments flashcards as text
A trader sells a put option on a stock with a strike price of $50 and receives a premium of $3. What is the maximum profit for this short put position?
Answer: $3
The maximum profit for a short put is limited to the premium received ($3), achieved when the option expires worthless.
Which of the following best describes a total return swap?
Answer: An agreement where one party receives the total return of an asset and pays a floating rate
A total return swap transfers both income and capital gains/losses of a reference asset in exchange for a floating rate payment.
In private equity, what does the term 'J-curve' refer to?
Answer: The initial negative returns followed by positive returns as investments mature
The J-curve describes early negative returns in PE funds due to fees and slow value creation, followed by positive returns as investments mature and are exited.
What is the primary purpose of using a currency forward contract for a US company with euro receivables?
Answer: To lock in the exchange rate at which euros will be converted to dollars
A currency forward locks in a specific exchange rate for a future date, eliminating uncertainty from exchange rate fluctuations.
Which Greek measures the rate of change of an option's delta with respect to the underlying asset price?
Answer: Gamma
Gamma measures how much delta changes for a $1 move in the underlying, indicating the curvature of the option's price relative to the asset.
A hedge fund employs a long/short equity strategy. If a manager is net long 60% and gross exposure is 200%, what is the short exposure?
Answer: 70%
If net long = long - short = 60% and gross = long + short = 200%, then long = 130% and short = 70%.
Which of the following is a characteristic of commodity futures markets that distinguishes them from equity futures markets?
Answer: Convenience yield plays a significant role in commodity futures pricing
Convenience yield reflects the non-monetary benefit of holding the physical commodity and is a key factor in commodity futures pricing not present in equity futures.