CFA Derivatives & Alternative Investments 2

Question 1

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?

Accepted Answer

$3

Answer

The maximum profit for a short put is limited to the premium received ($3), achieved when the option expires worthless.

Question 2

Which of the following best describes a total return swap?

Accepted Answer

An agreement where one party receives the total return of an asset and pays a floating rate

Answer

A total return swap transfers both income and capital gains/losses of a reference asset in exchange for a floating rate payment.

Question 3

In private equity, what does the term 'J-curve' refer to?

Accepted Answer

The initial negative returns followed by positive returns as investments mature

Answer

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.

Question 4

What is the primary purpose of using a currency forward contract for a US company with euro receivables?

Accepted Answer

To lock in the exchange rate at which euros will be converted to dollars

Answer

A currency forward locks in a specific exchange rate for a future date, eliminating uncertainty from exchange rate fluctuations.

Question 5

Which Greek measures the rate of change of an option's delta with respect to the underlying asset price?

Accepted Answer

Gamma

Answer

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.

CFA Practice Test

CFA Practice Test

CFA Derivatives & Alternative Investments 2