CFM Derivatives & Hedging Strategies 2

Question 1

A fund manager holds a long equity portfolio and buys put options to hedge downside risk. This strategy is best described as:

Accepted Answer

A protective put

Answer

Buying put options on an existing long position creates a protective put, limiting downside while preserving upside.

Question 2

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 the convexity of the option's value, i.e., how fast delta changes as the underlying price moves.

Question 3

A basis swap involves the exchange of:

Accepted Answer

Two different floating rate payments

Answer

A basis swap exchanges two floating-rate cash flows tied to different reference rates, such as SOFR vs. T-bill rate.

Question 4

When a futures contract is in backwardation, the futures price is:

Accepted Answer

Lower than the current spot price

Answer

Backwardation occurs when futures prices are below the current spot price, often due to high convenience yields or supply shortages.

Question 5

A fund uses a cross-hedge to manage currency exposure on a position in Danish Krone (DKK) using Euro (EUR) futures. The main risk of this approach is:

Accepted Answer

Basis risk between DKK and EUR

Answer

Cross-hedging introduces basis risk because DKK and EUR, while correlated, do not move in perfect lockstep.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Derivatives & Hedging Strategies 2