CPM Derivatives & Hedging Strategies 2

Question 1

In futures hedging, 'basis risk' refers to the risk that:

Accepted Answer

The change in futures price does not perfectly offset the change in spot price

Answer

The futures price exceeds the spot price at expiration

Answer

The counterparty to a futures transaction defaults

Answer

The futures contract expires before the hedging need is met

Question 2

A swap where one party pays a fixed interest rate and receives a floating rate is called a:

Accepted Answer

Pay-fixed interest rate swap

Answer

Currency swap

Answer

Total return swap

Answer

Credit default swap

Question 3

Credit default swaps (CDS) are primarily used in portfolio management to:

Accepted Answer

Transfer or hedge credit risk associated with a bond issuer

Answer

Increase equity market exposure without buying stocks

Answer

Speculate on interest rate movements

Answer

Convert fixed-rate bonds to floating-rate bonds

Question 4

A portfolio manager wishes to increase portfolio duration without buying bonds. The most appropriate derivatives strategy is to:

Accepted Answer

Enter a receive-fixed interest rate swap

Answer

Sell interest rate futures

Answer

Enter a pay-fixed interest rate swap

Answer

Buy put options on bond futures

Question 5

The Black-Scholes option pricing model is primarily used to:

Accepted Answer

Determine the theoretical fair price of European options

Answer

Calculate the fair value of futures contracts

Answer

Assess credit risk in bond portfolios

Answer

Estimate the expected return of equity portfolios

Question 6

The maximum loss for the buyer of a put option is:

Accepted Answer

The premium paid for the option

Answer

Unlimited

Answer

The strike price minus the premium paid

Answer

The current market price of the underlying asset

Question 7

A call option is considered 'in-the-money' when:

Accepted Answer

The underlying asset's price exceeds the strike price

Answer

The underlying asset's price equals the strike price

Answer

The underlying asset's price is below the strike price

Answer

The option's time value exceeds its intrinsic value