CFM Derivatives & Hedging Strategies 5

Question 1

An equity fund manager sells index futures equal to the portfolio's beta-adjusted value to temporarily reduce market exposure. This technique is called:

Accepted Answer

Tactical asset allocation using derivatives

Answer

Using index futures to adjust a portfolio's market exposure without trading the underlying securities is a common tactical asset allocation technique.

Question 2

Put-call parity for European options states that:

Accepted Answer

C - P = S - PV(K)

Answer

Put-call parity: C - P = S - PV(K), meaning a long call minus a long put equals the current stock price minus the present value of the strike.

Question 3

When hedging a foreign currency receivable due in 90 days using forward contracts, the fund manager should:

Accepted Answer

Sell the foreign currency forward

Answer

Selling the foreign currency forward locks in the exchange rate for converting the future receivable back to domestic currency.

Question 4

Which of the following best describes theta in options pricing?

Accepted Answer

The rate at which an option loses value due to the passage of time

Answer

Theta measures time decay — the amount by which an option's value decreases as each day passes, all else equal.

Question 5

A fund manager enters a commodity swap paying fixed and receiving floating oil prices to hedge fuel costs. If oil prices rise significantly, the fund manager's swap position will:

Accepted Answer

Generate a gain as floating receipts exceed fixed payments

Answer

When oil prices rise, the floating receipts increase above the fixed payments, generating a gain on the swap that offsets higher fuel costs.

(CFM) Certified Fund Manager Practice Test

(CFM) Certified Fund Manager Practice Test

CFM Derivatives & Hedging Strategies 5