CPFM Options, Futures, and Derivatives 3

Question 1

Theta in option pricing primarily represents:

Accepted Answer

Time decay of the option

Answer

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:

Accepted Answer

Selling euro futures

Answer

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:

Accepted Answer

Underlying price minus strike

Answer

An in-the-money call's intrinsic value is the underlying price minus the strike price.

Question 4

A protective put strategy involves:

Accepted Answer

Owning stock and buying a put

Answer

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?

Accepted Answer

Forward contract

Answer

A forward contract obligates both parties to buy and sell at the agreed price.

CPFM Practice Test