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 commodity producer wants to hedge its output against falling prices. Which strategy is most appropriate?
Answer: Short futures position on the commodity
A producer short futures position gains value when commodity prices fall, offsetting losses on the physical production.
What does 'backwardation' mean in a futures market?
Answer: The futures price is below the expected spot price at expiration
Backwardation occurs when futures prices are below expected future spot prices, often driven by high convenience yields in commodity markets.
Which of the following best characterizes the 'carried interest' compensation structure in private equity?
Answer: A performance fee typically equal to 20% of profits above a hurdle rate
Carried interest is the GP's share of profits (typically 20%) earned on fund returns above a specified hurdle rate.
An investor creates a protective put by holding a stock worth $100 and buying a put with strike $95. What is the maximum loss on the combined position if the put costs $4?
Answer: $9
Maximum loss = Stock purchase price - Put strike + Put premium = $100 - $95 + $4 = $9, occurring if the stock falls to $95 or below.
In the context of hedge fund strategies, what is 'convertible arbitrage'?
Answer: Buying convertible bonds and shorting the issuer's equity to exploit mispricing
Convertible arbitrage exploits mispricing between a convertible bond and the underlying equity by going long the bond and short the stock.
Which formula correctly represents the cost of carry model for futures pricing?
Answer: F = S × e^(r+c-y)T
The cost of carry model prices a futures contract as the spot price compounded at the net cost of carry (risk-free rate plus storage costs minus convenience yield).
What is the primary source of return difference between REIT investing and direct real estate investing?
Answer: REITs provide liquidity and daily pricing while direct investments are illiquid and appraisal-based
REITs trade on exchanges with daily pricing and liquidity, while direct real estate relies on infrequent appraisals and has high transaction costs.