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 is a key advantage of exchange-traded options over OTC options?
Answer: Elimination of counterparty credit risk through central clearing
Exchange-traded options are cleared through a central clearinghouse, which guarantees performance and eliminates bilateral counterparty credit risk.
A company with floating-rate debt enters a pay-fixed, receive-floating interest rate swap. What effective rate does the company pay?
Answer: A synthetic fixed rate combining its floating debt payments and the swap's net settlement
The company pays floating on its debt and receives floating from the swap (which nets to approximately zero), leaving only the fixed swap payment — creating a synthetic fixed rate.
What is the 'time value' of an option?
Answer: The portion of the option premium above intrinsic value, reflecting remaining time to expiry
Time value represents the extra amount buyers pay beyond intrinsic value for the possibility that favorable price movements will occur before expiry.
What does a high positive gamma indicate about an options position?
Answer: The delta of the position will change rapidly with small moves in the underlying
High gamma means delta changes quickly with price movements, requiring frequent rebalancing for delta-neutral strategies and indicating sensitivity to price direction.
Under the CSC framework, which of the following is a characteristic of a forward rate agreement (FRA)?
Answer: It is an OTC contract fixing an interest rate for a future period
An FRA is a bilateral OTC contract in which two parties agree on an interest rate to be applied to a notional amount for a specified future period.
Which scenario would result in a loss for the buyer of a put option at expiry?
Answer: The underlying price rises above the strike price
A put buyer profits when the underlying falls below the strike; if the underlying price is above the strike at expiry, the put expires worthless and the buyer loses the full premium.
Which of the following best describes 'delta' for a long call option as it moves deep in-the-money?
Answer: Delta approaches +1, meaning the option moves almost dollar-for-dollar with the underlying
As a call option moves deep in-the-money, its delta approaches +1 because the option behaves increasingly like owning the underlying asset outright.