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
In the context of interest rate swaps, what is the 'swap spread'?
Answer: The difference between the fixed swap rate and the yield on a comparable Treasury security
The swap spread equals the fixed swap rate minus the Treasury yield for the same maturity, reflecting credit risk and liquidity differences.
A real estate investment with NOI of $500,000 and a cap rate of 6.25% has an estimated value of:
Answer: $8,000,000
Property value = NOI / Cap Rate = $500,000 / 0.0625 = $8,000,000.
Which type of option strategy involves buying a call and selling a higher-strike call on the same underlying with the same expiration?
Answer: Bull call spread
A bull call spread profits from a moderate rise in the underlying by buying a lower-strike call and selling a higher-strike call.
What is the key distinction between a futures contract and a forward contract?
Answer: Futures are standardized and exchange-traded with daily mark-to-market, while forwards are customized OTC contracts
Futures are standardized, exchange-traded, and marked to market daily, while forwards are customized OTC agreements settled at expiration.
A venture capital fund invests in early-stage companies. Which valuation approach is most commonly used when comparable public companies exist?
Answer: Venture capital method using exit multiples and target IRR
The VC method estimates exit value using comparable company multiples and back-solves for current value based on a target IRR.
Which of the following describes the payoff of a long position in a credit default swap (CDS)?
Answer: Receives payment if the reference entity defaults
The CDS buyer (long protection) receives a payment upon the reference entity's default, compensating for losses on the underlying credit exposure.
In options pricing, implied volatility differs from historical volatility in that implied volatility is:
Answer: Forward-looking, derived from current option market prices
Implied volatility is the market's consensus forecast of future volatility, derived by solving for the volatility that makes the model price equal to the market price.