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

A protective put involves buying put options on held securities to cap downside losses while still allowing the portfolio to benefit from price appreciation.

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

A call option grants the holder the right—but not the obligation—to purchase the underlying asset at the strike price before or at expiration.

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

Selling equity index futures reduces systematic risk exposure (beta) because the short futures position gains when the market falls, offsetting portfolio losses.

Question 4

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

Accepted Answer

0 and 1

Answer

Call option delta is always between 0 and 1, representing the fractional change in option price for a $1 change in the underlying asset price.

Question 5

In a collar strategy, the portfolio manager simultaneously:

Accepted Answer

Buys a put and sells a call at a higher strike

Answer

A collar involves holding the underlying asset, buying a protective put (downside floor), and selling a covered call (upside cap), reducing the net cost of the hedge.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Derivatives & Hedging Strategies