FREE CDP Risk Management & Hedging Questions and Answers

Question 1

What is the primary purpose of hedging in financial markets?

Accepted Answer

To reduce or mitigate potential losses.

Answer

To maximize profits through speculation.

Answer

To eliminate all financial risks.

Answer

To increase exposure to market volatility.

Question 2

Which of the following best describes a 'macro hedge'?

Accepted Answer

Hedging the overall exposure of a portfolio.

Answer

Hedging a specific asset or transaction.

Answer

Speculating on macroeconomic trends.

Answer

Avoiding the use of derivatives in risk management.

Question 3

What is a 'cross hedge' in risk management?

Accepted Answer

Hedging a position with a different but correlated asset.

Answer

Hedging a position with the same asset.

Answer

Using unrelated assets to hedge.

Answer

Avoiding hedging to accept full market risk.

Question 4

Which derivative instrument is commonly used to hedge interest rate risk?

Accepted Answer

Interest rate swaps.

Answer

Equity options.

Answer

Commodity futures.

Answer

Currency forwards.

Question 5

In hedging, what does the term 'basis risk' refer to?

Accepted Answer

The risk that the hedge and the underlying asset do not move in perfect correlation.

Answer

The risk of a company going bankrupt.

Answer

The risk of interest rates remaining unchanged.

Answer

The risk associated with currency exchange rates.