CSC Derivatives and Risk Management 4

Question 1

Which of the following describes a 'straddle' options strategy?

Accepted Answer

Buying both a call and a put at the same strike price and expiry

Answer

A long straddle profits from large price movements in either direction because it holds both a call and a put at the same strike.

Question 2

Under CSC exam content, what is the theoretical fair value of a forward contract most directly based on?

Accepted Answer

The spot price adjusted for carrying costs over the contract period

Answer

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.

Question 3

A company is exposed to declining oil prices on its inventory. Which derivative position best hedges this price risk?

Accepted Answer

Sell oil futures

Answer

Selling oil futures locks in a sale price, offsetting losses on physical inventory if oil prices fall.

Question 4

What is 'implied volatility' in options pricing?

Accepted Answer

The volatility level that, when input into a pricing model, produces the current market option price

Answer

Implied volatility is derived by solving the option pricing model in reverse — it reflects the market's collective expectation of future volatility.

Question 5

What risk does a short futures position expose the holder to if the underlying price rises sharply?

Accepted Answer

Unlimited loss potential, as losses are marked to market daily

Answer

Short futures positions are marked to market daily, and rising prices generate variation margin calls with theoretically unlimited loss potential.

CSC - Canadian Securities Course Practice Test