CFA Derivatives and Risk Management

Question 1

A European call option gives the holder the right to:

Accepted Answer

Buy the underlying asset at the strike price only at expiration

Answer

A European call option grants the right (not obligation) to buy the underlying at the strike price, but only on the expiration date, not before.

Question 2

Put-call parity states that for European options, the relationship is:

Accepted Answer

Call price + Strike price (PV) = Put price + Current stock price

Answer

Put-call parity: C + PV(X) = P + S, where C = call price, PV(X) = present value of strike, P = put price, S = current stock price.

Question 3

Which of the following is the MAIN difference between a forward contract and a futures contract?

Accepted Answer

Futures are marked-to-market daily with margin requirements; forwards are settled at expiration

Answer

Futures are exchange-traded with daily mark-to-market and margin requirements, while forwards are OTC contracts settled at maturity without daily settlement.

Question 4

Delta (Δ) of an option measures:

Accepted Answer

The rate of change of option price with respect to a $1 change in the underlying asset price

Answer

Delta measures how much the option's price changes for a $1 move in the underlying asset; it ranges from 0 to 1 for calls and –1 to 0 for puts.

Question 5

A portfolio manager wants to hedge against a decline in a stock portfolio using put options. The strategy is BEST described as:

Accepted Answer

A protective put

Answer

A protective put involves holding the stock (long) and buying put options to limit downside losses while retaining upside potential.

CFA Practice Test

CFA Practice Test

CFA Derivatives and Risk Management