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Derivatives & Hedging Strategies Flashcards

7 cards from real CPM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. What is the primary purpose of a protective put strategy in portfolio management?

    Answer: To limit downside losses while retaining upside potential

    A protective put involves buying put options on held securities to cap downside losses while still allowing the portfolio to benefit from price appreciation.

  2. Which derivative instrument gives the holder the right, but not the obligation, to buy an underlying asset at a specified price?

    Answer: Call option

    A call option grants the holder the right—but not the obligation—to purchase the underlying asset at the strike price before or at expiration.

  3. To reduce a portfolio's beta from 1.2 to 0.8 using equity index futures, the portfolio manager should:

    Answer: Sell equity index futures

    Selling equity index futures reduces systematic risk exposure (beta) because the short futures position gains when the market falls, offsetting portfolio losses.

  4. The delta of a standard European call option is always bounded between:

    Answer: 0 and 1

    Call option delta is always between 0 and 1, representing the fractional change in option price for a $1 change in the underlying asset price.

  5. In a collar strategy, the portfolio manager simultaneously:

    Answer: Buys a put and sells a call at a higher strike

    A collar involves holding the underlying asset, buying a protective put (downside floor), and selling a covered call (upside cap), reducing the net cost of the hedge.

  6. What is the key difference between a forward contract and a futures contract?

    Answer: Futures are standardized and marked to market daily, while forwards are customized OTC contracts

    Futures contracts are standardized, exchange-traded, and subject to daily mark-to-market settlement, while forward contracts are customized OTC agreements settled only at maturity.

  7. Which hedging strategy involves selling call options on securities already held in the portfolio?

    Answer: Covered call

    A covered call strategy involves selling call options on securities already owned, generating premium income while capping upside potential.