Derivatives and Risk Management Flashcards
7 cards from real CSC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Derivatives and Risk Management flashcards as text
What is 'delta hedging' in options trading?
Answer: Continuously adjusting a position in the underlying to maintain a delta-neutral portfolio
Delta hedging involves rebalancing the hedge ratio as delta changes so that the net position has zero directional exposure to small price moves.
A protective put strategy involves:
Answer: Buying a put option on a stock you already own long
A protective put pairs a long stock position with a long put, creating a floor on potential losses while preserving upside.
Which risk is specifically associated with over-the-counter (OTC) derivatives but not exchange-traded derivatives?
Answer: Counterparty credit risk
OTC derivatives lack central clearing, so each party bears the risk that the other party may default on its obligations.
An interest rate cap protects a borrower with floating-rate debt because it:
Answer: Pays the borrower when the reference rate exceeds the cap rate
An interest rate cap compensates the holder when market rates rise above the agreed cap rate, limiting the effective borrowing cost.
What does 'open interest' represent in futures markets?
Answer: The number of outstanding contracts not yet settled or closed
Open interest counts all futures contracts that remain open (not offset or delivered), reflecting the total market commitment.
A bull call spread involves buying a call at a lower strike and selling a call at a higher strike. What is the maximum profit?
Answer: The difference between the two strike prices minus the net premium paid
Maximum profit is capped at the spread width (difference in strikes) minus the net premium paid, achieved when the underlying is at or above the higher strike at expiry.
In a plain vanilla interest rate swap, which party benefits when floating rates rise significantly above the fixed rate?
Answer: The fixed-rate payer (floating-rate receiver)
The fixed-rate payer receives the higher floating payments, resulting in a net gain when floating rates exceed the fixed rate.