CSC Derivatives and Risk Management 3

Question 1

What is 'delta hedging' in options trading?

Accepted Answer

Continuously adjusting a position in the underlying to maintain a delta-neutral portfolio

Answer

Delta hedging involves rebalancing the hedge ratio as delta changes so that the net position has zero directional exposure to small price moves.

Question 2

A protective put strategy involves:

Accepted Answer

Buying a put option on a stock you already own long

Answer

A protective put pairs a long stock position with a long put, creating a floor on potential losses while preserving upside.

Question 3

Which risk is specifically associated with over-the-counter (OTC) derivatives but not exchange-traded derivatives?

Accepted Answer

Counterparty credit risk

Answer

OTC derivatives lack central clearing, so each party bears the risk that the other party may default on its obligations.

Question 4

An interest rate cap protects a borrower with floating-rate debt because it:

Accepted Answer

Pays the borrower when the reference rate exceeds the cap rate

Answer

An interest rate cap compensates the holder when market rates rise above the agreed cap rate, limiting the effective borrowing cost.

Question 5

What does 'open interest' represent in futures markets?

Accepted Answer

The number of outstanding contracts not yet settled or closed

Answer

Open interest counts all futures contracts that remain open (not offset or delivered), reflecting the total market commitment.

CSC - Canadian Securities Course Practice Test