FM FM Derivatives and Options 3

Question 1

A 'floor' is a series of interest rate put options (floorlets) used by investors to:

Accepted Answer

Guarantee a minimum interest rate received on a floating-rate investment

Answer

An interest rate floor protects a floating-rate investor from falling rates by providing payoffs when the reference rate drops below the floor rate.

Question 2

A collar strategy involves:

Accepted Answer

Buying a put at a lower strike and selling a call at a higher strike to hedge an asset

Answer

A collar limits an asset's downside by buying a put and finances part of the cost by selling a call, capping upside.

Question 3

Under the FM exam framework, if no arbitrage holds and dividends are paid at continuous rate q, the forward price is:

Accepted Answer

F₀ = S₀ × e^((r−q)T)

Answer

With continuous dividends at rate q, the cost-of-carry model gives F₀ = S₀ · e^((r−q)T).

Question 4

The delta of a long call option is always:

Accepted Answer

Between 0 and 1

Answer

Call delta ∈ (0, 1): the option price rises by less than $1 for each $1 increase in the underlying asset.

Question 5

A straddle is formed by:

Accepted Answer

Buying a call and a put with the same strike and expiration

Answer

A long straddle profits from large price moves in either direction by combining a long call and a long put at the same strike.

FM - Certifications in Financial Mathematics Practice Test