FIA Derivatives & Risk Products 4

Question 1

Which risk measure captures the maximum potential loss over a specified time horizon at a given confidence level?

Accepted Answer

Value at Risk (VaR)

Answer

VaR estimates the worst expected loss over a period at a specified confidence level (e.g., 99% confidence, 1-day horizon).

Question 2

A 'knock-in' barrier option becomes active only when:

Accepted Answer

The underlying touches a specified barrier price

Answer

A knock-in option starts as inactive and only becomes a standard option if the underlying asset price touches the barrier level.

Question 3

In a commodity swap, the 'fixed price payer' benefits when:

Accepted Answer

Commodity prices rise above the fixed price

Answer

The fixed price payer receives the floating (market) price; when spot prices rise above the fixed rate, net receipts are positive.

Question 4

What does 'theta' represent in options pricing?

Accepted Answer

Rate of time decay in an option's value

Answer

Theta measures how much an option's value decreases each day, all else equal — options lose time value as expiration approaches.

Question 5

Which of the following best describes 'mark-to-market' for a futures position?

Accepted Answer

Daily settlement of gains and losses through the margin account

Answer

Futures are marked to market daily, with gains credited and losses debited from margin accounts through the clearinghouse.

(FIA) Financial Information Associate Certification Practice Test