FIA Derivatives & Risk Products 5

Question 1

An investor sells a covered call. The maximum profit from this strategy is:

Accepted Answer

The premium received plus any stock appreciation up to the strike price

Answer

The covered call caps upside at the strike price; max profit = call premium received + (strike price − purchase price of stock).

Question 2

Which swap structure is most commonly used by a corporation to convert floating-rate debt into fixed-rate debt?

Accepted Answer

Plain vanilla interest rate swap (pay fixed, receive floating)

Answer

A pay-fixed, receive-floating interest rate swap offsets the floating payments on existing debt, effectively converting it to fixed-rate.

Question 3

The 'rho' of an option measures its sensitivity to changes in:

Accepted Answer

The risk-free interest rate

Answer

Rho quantifies how much an option's price changes for a 1% change in the risk-free interest rate.

Question 4

Which of the following correctly describes 'backwardation' in a commodity futures market?

Accepted Answer

Spot prices exceed futures prices

Answer

Backwardation occurs when the spot price is above the futures price, often signaling tight near-term supply or high convenience yield.

Question 5

Under the put-call parity relationship, buying a call and selling a put at the same strike and expiry is equivalent to:

Accepted Answer

A long forward position on the underlying asset

Answer

Put-call parity shows that a long call plus a short put at the same strike/expiry replicates a long forward contract on the underlying.

(FIA) Financial Information Associate Certification Practice Test