CPM Derivatives & Hedging Strategies 3

Question 1

Compared to OTC options, exchange-traded options are primarily characterized by:

Accepted Answer

Standardized terms and lower counterparty risk due to a central clearinghouse

Answer

Greater customization and lower counterparty risk

Answer

Customized terms and higher counterparty risk

Answer

No margin requirements and bilateral settlement

Question 2

Currency swaps are primarily used by portfolio managers to:

Accepted Answer

Exchange cash flows in different currencies to manage foreign exchange risk

Answer

Hedge interest rate risk in domestic bond portfolios

Answer

Increase equity beta exposure in international markets

Answer

Speculate on commodity price movements

Question 3

'Delta hedging' in options portfolio management refers to:

Accepted Answer

Maintaining a position in the underlying asset sized to offset an option's delta exposure

Answer

Hedging using only deep-in-the-money options

Answer

Selling options when implied volatility exceeds historical volatility

Answer

Using futures contracts to replicate option payoff profiles

Question 4

Which options Greek measures how much an option's delta changes for a $1 move in the underlying asset price?

Accepted Answer

Gamma

Answer

Theta

Answer

Vega

Answer

Rho

Question 5

In futures markets, 'marking to market' refers to:

Accepted Answer

The daily settlement process where gains and losses are credited or debited to margin accounts

Answer

Adjusting the futures price to reflect spot prices at expiration

Answer

Determining the fair value of illiquid futures contracts

Answer

Rebalancing portfolio weights to target allocations

Question 6

Compared to interest rate swaps, the primary advantage of using interest rate futures for short-term hedging is:

Accepted Answer

Greater liquidity and ease of entering and exiting positions

Answer

Greater customization of contract terms and notional amounts

Answer

No margin requirements and lower transaction costs

Answer

Ability to exchange principal amounts in different currencies

Question 7

'Contango' in futures markets describes a market structure where:

Accepted Answer

The futures price exceeds the current spot price

Answer

The futures price is below the expected future spot price

Answer

The spot price exceeds the futures price for all maturities

Answer

Futures and spot prices are equal across all delivery dates