CFA Derivatives & Alternative Investments 3

Question 1

In the context of interest rate swaps, what is the 'swap spread'?

Accepted Answer

The difference between the fixed swap rate and the yield on a comparable Treasury security

Answer

The swap spread equals the fixed swap rate minus the Treasury yield for the same maturity, reflecting credit risk and liquidity differences.

Question 2

A real estate investment with NOI of $500,000 and a cap rate of 6.25% has an estimated value of:

Accepted Answer

$8,000,000

Answer

Property value = NOI / Cap Rate = $500,000 / 0.0625 = $8,000,000.

Question 3

Which type of option strategy involves buying a call and selling a higher-strike call on the same underlying with the same expiration?

Accepted Answer

Bull call spread

Answer

A bull call spread profits from a moderate rise in the underlying by buying a lower-strike call and selling a higher-strike call.

Question 4

What is the key distinction between a futures contract and a forward contract?

Accepted Answer

Futures are standardized and exchange-traded with daily mark-to-market, while forwards are customized OTC contracts

Answer

Futures are standardized, exchange-traded, and marked to market daily, while forwards are customized OTC agreements settled at expiration.

Question 5

A venture capital fund invests in early-stage companies. Which valuation approach is most commonly used when comparable public companies exist?

Accepted Answer

Venture capital method using exit multiples and target IRR

Answer

The VC method estimates exit value using comparable company multiples and back-solves for current value based on a target IRR.

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