CPM Derivatives & Hedging Strategies

Question 1

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

Accepted Answer

To limit downside losses while retaining upside potential

Answer

To generate additional income from the portfolio

Answer

To increase portfolio leverage

Answer

To eliminate all portfolio risk

Question 2

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

Accepted Answer

Call option

Answer

Futures contract

Answer

Forward contract

Answer

Put option

Question 3

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

Accepted Answer

Sell equity index futures

Answer

Buy equity index futures

Answer

Buy call options on the index

Answer

Enter a total return swap as the receiver

Question 4

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

Accepted Answer

0 and 1

Answer

-1 and 0

Answer

-1 and 1

Answer

0 and infinity

Question 5

In a collar strategy, the portfolio manager simultaneously:

Accepted Answer

Buys a put and sells a call at a higher strike

Answer

Buys a put and buys a call at different strikes

Answer

Sells a put and buys a call at the same strike

Answer

Sells both a put and a call at the current market price

Question 6

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

Accepted Answer

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

Answer

Futures contracts are settled only at maturity, while forwards are marked to market daily

Answer

Forwards are standardized and exchange-traded, while futures are customized OTC contracts

Answer

There is no practical difference between the two instruments

Question 7

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

Accepted Answer

Covered call

Answer

Protective put

Answer

Long straddle

Answer

Collar