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
Which of the following describes a 'straddle' options strategy?
Answer: Buying both a call and a put at the same strike price and expiry
A long straddle profits from large price movements in either direction because it holds both a call and a put at the same strike.
Under CSC exam content, what is the theoretical fair value of a forward contract most directly based on?
Answer: The spot price adjusted for carrying costs over the contract period
Forward price = Spot price × e^(r×T) (or spot + cost of carry), reflecting financing costs and any income from the asset over the holding period.
A company is exposed to declining oil prices on its inventory. Which derivative position best hedges this price risk?
Answer: Sell oil futures
Selling oil futures locks in a sale price, offsetting losses on physical inventory if oil prices fall.
What is 'implied volatility' in options pricing?
Answer: The volatility level that, when input into a pricing model, produces the current market option price
Implied volatility is derived by solving the option pricing model in reverse — it reflects the market's collective expectation of future volatility.
What risk does a short futures position expose the holder to if the underlying price rises sharply?
Answer: Unlimited loss potential, as losses are marked to market daily
Short futures positions are marked to market daily, and rising prices generate variation margin calls with theoretically unlimited loss potential.
A collar strategy on a long stock position involves:
Answer: Buying a put and selling a call, both out-of-the-money, on the same stock
A collar limits downside via a long put and funds part of its cost by capping upside through a short call, creating a bracketed return range.
In Canadian futures markets, what is the purpose of 'variation margin'?
Answer: Daily cash settlements to reflect gains or losses from price changes
Variation margin is the daily cash flow resulting from mark-to-market settlement, crediting gains or debiting losses to each account.