CFM Derivatives & Hedging Strategies 3

Question 1

A total return swap allows the protection buyer to:

Accepted Answer

Transfer the credit and market risk of a reference asset to the counterparty

Answer

In a total return swap, the buyer pays the total return of a reference asset and receives a floating rate, effectively transferring both credit and market risk.

Question 2

The delta of a deep in-the-money call option approaches:

Accepted Answer

1

Answer

As a call option moves deep in-the-money, it behaves increasingly like the underlying asset itself, so delta approaches 1.

Question 3

Which strategy profits from low volatility and a range-bound underlying asset?

Accepted Answer

Long iron condor

Answer

A long iron condor involves selling an OTM strangle and buying a wider OTM strangle, profiting when the underlying stays within a defined range.

Question 4

For a bond portfolio manager, duration-based hedging using Treasury futures requires adjusting the number of contracts based on:

Accepted Answer

The dollar duration of the portfolio and the futures contract

Answer

The number of futures contracts needed equals the target dollar duration change divided by the dollar duration of one futures contract.

Question 5

A swaption that gives the holder the right to enter a swap as the fixed-rate payer is called a:

Accepted Answer

Payer swaption

Answer

A payer swaption grants the right to pay fixed and receive floating, and gains value when interest rates rise.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Derivatives & Hedging Strategies 3