CPFM Options, Futures, and Derivatives 3 — Questions and Answers
Question 1: Theta in option pricing primarily represents:
- Time decay of the option (Correct answer)
- Interest rate sensitivity
- Volatility sensitivity
- Underlying price sensitivity
Correct answer: Time decay of the option
Theta measures the rate of decline in option value due to the passage of time.
Question 2: A company expecting to receive euros in 90 days can hedge currency risk by:
- Buying euro futures
- Selling euro futures (Correct answer)
- Buying euro call options
- Doing nothing
Correct answer: Selling euro futures
Selling euro futures locks in a sale price for euros to be received later.
Question 3: The intrinsic value of an in-the-money call option equals:
- Premium minus strike
- Underlying price minus strike (Correct answer)
- Strike minus underlying price
- Premium plus time value
Correct answer: Underlying price minus strike
An in-the-money call's intrinsic value is the underlying price minus the strike price.
Question 4: A protective put strategy involves:
- Owning stock and buying a put (Correct answer)
- Owning stock and selling a call
- Buying a call and selling a put
- Selling stock and buying a put
Correct answer: Owning stock and buying a put
A protective put combines a long stock position with a long put to limit downside.
Question 5: Which derivative obligates both parties to transact, rather than granting a right?
- Call option
- Put option
- Forward contract (Correct answer)
- Warrant
Correct answer: Forward contract
A forward contract obligates both parties to buy and sell at the agreed price.
Question 6: Credit default swaps (CDS) are primarily used to:
- Hedge interest rate risk
- Transfer credit risk of a reference entity (Correct answer)
- Speculate on currency moves
- Lock in commodity prices
Correct answer: Transfer credit risk of a reference entity
A CDS transfers the credit risk of a borrower defaulting to the protection seller.
Question 7: The minimum amount that must be maintained in a futures margin account is the:
- Initial margin
- Maintenance margin (Correct answer)
- Variation margin
- Settlement margin
Correct answer: Maintenance margin
Maintenance margin is the floor below which a margin call is triggered.
CPFM Options, Futures, and Derivatives 3
Theta in option pricing primarily represents: