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

Basis risk is the risk that the difference between the spot price and futures price (the 'basis') changes unexpectedly, causing an imperfect hedge.

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

In a pay-fixed interest rate swap, one counterparty pays a fixed rate and receives a floating rate (e.g., SOFR), effectively converting fixed-rate exposure to floating-rate exposure.

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

CDS contracts allow portfolio managers to buy or sell protection against the default of a bond issuer, effectively transferring credit risk without selling the underlying bond.

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

A receive-fixed interest rate swap (paying floating, receiving fixed) increases duration because fixed-rate receipts behave like long bond positions, increasing sensitivity to interest rate changes.

Question 5

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

Accepted Answer

Determine the theoretical fair price of European options

Answer

The Black-Scholes model calculates the theoretical fair value of European-style options based on inputs including stock price, strike price, time to expiration, volatility, and risk-free rate.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Derivatives & Hedging Strategies 2