Financial Risk Management Derivatives and Risk Hedging 3

Question 1

The 'theta' of a long option position is typically negative because:

Accepted Answer

Options lose extrinsic value as expiration approaches due to time decay

Answer

Options lose delta as the underlying price fluctuates

Answer

Options become more volatile near expiration

Answer

Options require larger margin deposits over time

Question 2

Which type of risk does a credit default swap (CDS) primarily transfer from buyer to seller?

Accepted Answer

Credit risk

Answer

Interest rate risk

Answer

Currency risk

Answer

Liquidity risk

Question 3

After entering a pay-fixed, receive-floating swap on top of floating-rate debt, a company's combined debt is effectively:

Accepted Answer

Fixed rate

Answer

Still floating, but at a lower spread

Answer

Zero-coupon until maturity

Answer

Indexed to credit spreads

Question 4

In the context of derivatives, 'delta hedging' refers to:

Accepted Answer

Continuously adjusting positions to maintain a delta-neutral portfolio

Answer

Setting the portfolio delta equal to exactly 1.0

Answer

Using delta to determine how many options to purchase for income

Answer

Eliminating all option Greeks simultaneously through a single trade

Question 5

An airline enters a long oil futures contract to hedge fuel costs. Oil prices then fall significantly. The outcome is:

Accepted Answer

The futures position generates a loss that offsets the benefit of lower fuel costs

Answer

The airline profits from both the futures gain and lower spot fuel costs

Answer

The airline benefits from lower costs with no impact from the futures contract

Answer

The futures contract is automatically cancelled when prices move against the position

Question 6

Which of the following accurately describes a 'collar' options strategy?

Accepted Answer

Owning the underlying, buying a protective put, and selling a covered call

Answer

Buying a call and selling a put with the same strike to create a synthetic long

Answer

Buying both a call and put with the same strike to profit from volatility

Answer

Selling both a call and put on the same underlying to collect premium

Question 7

In a standard interest rate swap, the 'notional principal' refers to:

Accepted Answer

The reference amount used solely to calculate periodic interest payments

Answer

The actual cash amount exchanged between counterparties at inception

Answer

The profit or loss realized by each party at swap maturity

Answer

The market value of the swap contract at any given point in time