CPFM Options, Futures, and Derivatives 5

Question 1

A long straddle profits when:

Accepted Answer

The underlying makes a large move in either direction

Answer

A long straddle (buying a call and put at the same strike) profits from large price moves either way.

Question 2

The cost-of-carry model for pricing futures includes all of the following EXCEPT:

Accepted Answer

The clearinghouse fee structure

Answer

Cost of carry includes storage, financing, and income yields, not clearinghouse fee structures.

Question 3

Rho measures an option's sensitivity to changes in:

Accepted Answer

Interest rates

Answer

Rho measures how an option's value changes with a change in the risk-free interest rate.

Question 4

A bull call spread is constructed by:

Accepted Answer

Buying a lower-strike call and selling a higher-strike call

Answer

A bull call spread buys a lower-strike call and sells a higher-strike call to reduce cost.

Question 5

As a futures contract approaches expiration, the futures price and spot price tend to:

Accepted Answer

Converge

Answer

Convergence causes futures and spot prices to meet at expiration.

CPFM Practice Test