CPFM Options, Futures, and Derivatives 4

Question 1

Gamma measures the rate of change of:

Accepted Answer

Delta with respect to the underlying price

Answer

Gamma is the second derivative, measuring how delta changes as the underlying moves.

Question 2

A covered call writer:

Accepted Answer

Owns the underlying stock and sells a call

Answer

A covered call involves owning the underlying and selling a call to earn premium income.

Question 3

Put-call parity relates the prices of European calls and puts with the same strike and expiration. It states C - P equals:

Accepted Answer

S - PV(strike)

Answer

Put-call parity gives C - P = S - present value of the strike price.

Question 4

When a futures price is below the expected future spot price, the market exhibits:

Accepted Answer

Backwardation

Answer

Backwardation occurs when futures prices are below the expected spot price.

Question 5

The primary advantage of exchange-traded options over OTC options is:

Accepted Answer

Reduced counterparty risk via a clearinghouse

Answer

Exchange-traded options use a clearinghouse that substantially reduces counterparty risk.

CPFM Practice Test