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

Exchange-traded options have standardized contract terms and are cleared through a central clearinghouse that guarantees performance, nearly eliminating counterparty default risk.

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

Currency swaps allow two parties to exchange principal and interest payments in different currencies, helping manage foreign exchange exposure in international portfolios.

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

Delta hedging involves taking an offsetting position in the underlying asset (or futures) sized by the option's delta to create a portfolio that is momentarily insensitive to small price moves.

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

Gamma measures the rate of change of delta with respect to changes in the underlying asset's price; high gamma means delta changes significantly with small price movements.

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

Marking to market is the daily settlement process in futures markets where open positions are revalued at the closing price, with profits credited and losses debited from margin accounts.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Derivatives & Hedging Strategies 3