CFM Derivatives & Hedging Strategies 4

Question 1

A collar strategy on a long stock position is constructed by:

Accepted Answer

Buying a put and selling a call at a higher strike

Answer

A collar finances a protective put by selling an OTM call, capping upside while protecting downside at low or zero net cost.

Question 2

Vega measures an option's sensitivity to changes in:

Accepted Answer

Implied volatility

Answer

Vega quantifies how much the option price changes for a 1% change in implied volatility.

Question 3

Under the Black-Scholes model, which assumption is most frequently violated in practice?

Accepted Answer

Volatility is constant over the option's life

Answer

In practice, implied volatility changes over time and across strikes (volatility smile/skew), violating the constant-volatility assumption.

Question 4

A fund manager wants to convert a fixed-rate bond portfolio to a synthetic floating-rate exposure without selling the bonds. The best approach is to:

Accepted Answer

Enter a pay-fixed, receive-floating interest rate swap

Answer

By paying fixed and receiving floating in a swap, the manager offsets the fixed coupon income from bonds, creating a net floating-rate exposure.

Question 5

A variance swap pays the difference between realized variance and the swap's strike variance. Compared to a volatility swap, variance swaps are:

Accepted Answer

More difficult to replicate and have convex payoff relative to volatility

Answer

Variance swaps have a convex payoff relative to volatility (since variance = vol²), making them more sensitive to large moves and harder to hedge linearly.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Derivatives & Hedging Strategies 4