CPFM Options, Futures, and Derivatives 2 — Questions and Answers
Question 1: A trader buys a call option with a strike price of $50 for a premium of $3. At what stock price does the trader break even at expiration?
- $47
- $50
- $53 (Correct answer)
- $56
Correct answer: $53
Break-even for a long call equals strike plus premium, so $50 + $3 = $53.
Question 2: Which Greek measures the rate of change of an option's price with respect to a change in the underlying asset's price?
- Delta (Correct answer)
- Theta
- Vega
- Rho
Correct answer: Delta
Delta measures sensitivity of the option price to changes in the underlying price.
Question 3: In a futures contract, the daily process of crediting and debiting accounts based on price changes is called:
- Settlement risk
- Marking to market (Correct answer)
- Contango
- Backwardation
Correct answer: Marking to market
Marking to market adjusts margin accounts daily to reflect gains and losses.
Question 4: A put option gives the holder the right to:
- Buy the underlying at the strike
- Sell the underlying at the strike (Correct answer)
- Receive dividends
- Convert the option to stock automatically
Correct answer: Sell the underlying at the strike
A put grants the right, not obligation, to sell the underlying at the strike price.
Question 5: When the futures price is higher than the expected future spot price and rises with maturity, the market is in:
- Backwardation
- Contango (Correct answer)
- Normal inversion
- Convergence
Correct answer: Contango
Contango describes futures prices above the spot, increasing with longer maturities.
Question 6: An interest rate swap most commonly exchanges:
- Two fixed-rate cash flows
- A fixed rate for a floating rate (Correct answer)
- Equity returns for bonds
- Currencies at spot
Correct answer: A fixed rate for a floating rate
A plain vanilla interest rate swap exchanges fixed-rate payments for floating-rate payments.
Question 7: Which factor does NOT increase the value of a call option under the Black-Scholes model?
- Higher volatility
- Longer time to expiration
- Higher strike price (Correct answer)
- Higher underlying price
Correct answer: Higher strike price
A higher strike price reduces a call option's value, all else equal.
CPFM Options, Futures, and Derivatives 2
A trader buys a call option with a strike price of $50 for a premium of $3.
At what stock price does the trader break even at expiration?