Financial Risk Management Derivatives and Risk Hedging 2

Question 1

A company with floating-rate debt enters a pay-fixed, receive-floating interest rate swap. This hedge protects against:

Accepted Answer

Rising interest rates

Answer

Falling interest rates

Answer

Credit spread widening

Answer

Currency depreciation

Question 2

Which Greek letter measures the rate of change of delta with respect to the underlying asset price?

Accepted Answer

Gamma

Answer

Vega

Answer

Theta

Answer

Rho

Question 3

A portfolio manager holds a large equity portfolio and wants to reduce market exposure without selling shares. The most efficient strategy is to:

Accepted Answer

Sell equity index futures contracts

Answer

Buy equity index futures contracts

Answer

Buy deep in-the-money call options

Answer

Enter a pay-fixed interest rate swap

Question 4

The optimal hedge ratio in a futures hedge is calculated as:

Accepted Answer

The correlation between spot and futures returns multiplied by the ratio of their standard deviations

Answer

The ratio of spot price to futures price

Answer

The portfolio beta divided by the futures contract size

Answer

The number of futures contracts divided by the portfolio value

Question 5

A cross-currency swap differs from a plain vanilla interest rate swap primarily because it:

Accepted Answer

Involves exchange of principal amounts in two different currencies

Answer

Involves only fixed-to-fixed interest rate payments

Answer

Does not require any periodic coupon payments

Answer

Is only available for maturities under one year

Question 6

'Vega' in options pricing measures the sensitivity of option price to changes in:

Accepted Answer

The implied volatility of the underlying

Answer

The passage of time to expiration

Answer

The risk-free interest rate

Answer

The price of the underlying asset

Question 7

A 'protective put' strategy involves:

Accepted Answer

Buying put options on a stock you already own to limit downside losses

Answer

Selling put options against a short stock position to generate income

Answer

Buying call options as protection against missing upside

Answer

Selling covered calls to generate premium income