CSC Derivatives and Risk Management 5

Question 1

Which of the following is a key advantage of exchange-traded options over OTC options?

Accepted Answer

Elimination of counterparty credit risk through central clearing

Answer

Exchange-traded options are cleared through a central clearinghouse, which guarantees performance and eliminates bilateral counterparty credit risk.

Question 2

A company with floating-rate debt enters a pay-fixed, receive-floating interest rate swap. What effective rate does the company pay?

Accepted Answer

A synthetic fixed rate combining its floating debt payments and the swap's net settlement

Answer

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.

Question 3

What is the 'time value' of an option?

Accepted Answer

The portion of the option premium above intrinsic value, reflecting remaining time to expiry

Answer

Time value represents the extra amount buyers pay beyond intrinsic value for the possibility that favorable price movements will occur before expiry.

Question 4

What does a high positive gamma indicate about an options position?

Accepted Answer

The delta of the position will change rapidly with small moves in the underlying

Answer

High gamma means delta changes quickly with price movements, requiring frequent rebalancing for delta-neutral strategies and indicating sensitivity to price direction.

Question 5

Under the CSC framework, which of the following is a characteristic of a forward rate agreement (FRA)?

Accepted Answer

It is an OTC contract fixing an interest rate for a future period

Answer

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.

CSC - Canadian Securities Course Practice Test

CSC - Canadian Securities Course Practice Test

CSC Derivatives and Risk Management 5