FIA Derivatives & Risk Products 2 — Questions and Answers
Question 1: Which Greek measures the rate of change of an option's delta with respect to the underlying asset's price?
- Delta
- Vega
- Gamma (Correct answer)
- Theta
Correct answer: Gamma
Gamma measures how much delta changes for a $1 move in the underlying, indicating the curvature of the option's value.
Question 2: A basis swap involves the exchange of:
- Fixed rate payments for equity returns
- Two different floating rate indices (Correct answer)
- Credit default payments for fixed premiums
- Currency-denominated fixed payments
Correct answer: Two different floating rate indices
A basis swap exchanges floating rate payments based on two different reference rates, such as SOFR vs. T-bill rate.
Question 3: What does the 'notional principal' in a swap contract represent?
- The actual amount exchanged at settlement
- The reference amount used to calculate interest payments (Correct answer)
- The market value of the swap at inception
- The collateral posted by both counterparties
Correct answer: The reference amount used to calculate interest payments
Notional principal is a reference figure used to compute swap cash flows; it is not actually exchanged between the parties.
Question 4: A variance swap pays the holder based on the difference between:
- Realized variance and a fixed strike variance (Correct answer)
- Implied volatility and historical volatility
- The VIX index and the S&P 500 return
- Two counterparties' credit spreads
Correct answer: Realized variance and a fixed strike variance
A variance swap settles on the difference between realized variance over the period and the pre-agreed strike variance.
Question 5: Under the Black-Scholes model, which input does NOT directly affect the theoretical price of a European call option?
- Current stock price
- Risk-free interest rate
- The stock's dividend yield
- The stock's historical trading volume (Correct answer)
Correct answer: The stock's historical trading volume
Black-Scholes uses price, volatility, time, risk-free rate, and dividends — historical volume is not an input.
Question 6: Which term describes the additional yield an investor receives for bearing credit risk in a bond relative to a risk-free benchmark?
- Duration spread
- Credit spread (Correct answer)
- OAS spread
- Z-spread
Correct answer: Credit spread
Credit spread is the yield difference between a risky bond and a comparable risk-free security, compensating for default risk.
Question 7: A long straddle strategy profits when the underlying asset experiences:
- Minimal price movement in either direction
- Large price movement in either direction (Correct answer)
- A steady upward trend only
- A steady downward trend only
Correct answer: Large price movement in either direction
A long straddle (buying a call and a put at the same strike) profits from large moves in either direction due to high gamma.
FIA Derivatives & Risk Products 2
Which Greek measures the rate of change of an option's delta with respect to the underlying asset's price?