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CISI Derivatives study materials
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CISI Derivatives (CISI) practice questions

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Question 1Derivatives fundamentals and market structure

A UK fund manager wants to hedge an equity portfolio against a broad market fall using a standardised exchange-traded contract. Which instrument is designed for this purpose?

  1. A corporate bond future
  2. A currency forward
  3. A stock index futures contract Correct answer.
  4. A covered warrant

Explanation

Stock index futures allow investors to take a position on the level of a broad market index, so selling them offsets losses on a long equity portfolio. They are standardised and exchange-traded, which suits a portfolio-wide hedge. The other instruments reference different underlying exposures.

Question 2Derivatives fundamentals and market structure

In a derivative contract, which feature distinguishes a forward from an option?

  1. The forward is always settled through a clearing house
  2. The forward creates a binding obligation on both parties Correct answer.
  3. The forward can only be written on currencies
  4. The forward requires an upfront premium payment

Explanation

Both parties to a forward are obliged to perform at maturity, whereas an option buyer has a right but not an obligation. This asymmetry means only the option buyer pays a premium. Forwards are typically bilateral and not centrally cleared.

Question 3Derivatives fundamentals and market structure

An investor buys a call option on a share. What is the maximum loss the investor can suffer on the option position itself?

  1. The premium paid Correct answer.
  2. Unlimited, because the share price can rise without limit
  3. The full notional value of the underlying shares
  4. The strike price minus the premium

Explanation

A long call gives the buyer a right, not an obligation, so the buyer can simply let the option expire worthless. The most that can be lost is therefore the premium originally paid. Gains are potentially large but losses are capped.

Question 4Derivatives fundamentals and market structure

Which party in a futures trade faces the clearing house as its counterparty after novation?

  1. Neither party, because futures are unsecured
  2. Only the buyer
  3. Only the seller
  4. Both the buyer and the seller Correct answer.

Explanation

Novation replaces the original bilateral contract with two contracts, each between a clearing member and the central counterparty. Consequently both sides face the clearing house rather than each other. This structure reduces counterparty credit risk.

Question 5Derivatives fundamentals and market structure

What does an initial margin requirement represent in a futures account?

  1. The full purchase price of the underlying asset
  2. A commission charged by the broker on each trade
  3. A tax levied by the exchange on open positions
  4. Collateral deposited to cover potential future losses Correct answer.

Explanation

Initial margin is performance collateral posted when a futures position is opened. It protects the clearing chain against adverse price moves before daily settlement. It is not a fee and does not represent full ownership cost.

Question 6Derivatives fundamentals and market structure

A trader expects the price of a commodity to fall and wishes to profit from that view using futures. Which action matches the view?

  1. Buy a call option on the commodity
  2. Sell a futures contract on the commodity Correct answer.
  3. Buy a futures contract on the commodity
  4. Enter a long forward on the commodity

Explanation

Selling futures establishes a short position that gains value when the underlying price falls. Buying futures or a call gains when prices rise. A long forward also profits from rising prices.

Question 7Derivatives fundamentals and market structure

Which characteristic is typical of an over-the-counter derivative contract?

  1. It is standardised by an exchange
  2. It must be traded on a recognised investment exchange
  3. It is always centrally cleared
  4. It is privately negotiated between the two parties Correct answer.

Explanation

OTC derivatives are bilaterally negotiated, allowing terms such as size, maturity and underlying to be tailored. Exchange-traded derivatives are standardised instead. Clearing arrangements for OTC trades vary and are not automatic.

Question 8Derivatives fundamentals and market structure

What is the primary economic function of a derivatives market for a hedger?

  1. Guaranteeing a profit on the underlying asset
  2. Providing loans against the underlying
  3. Transferring price risk to another party Correct answer.
  4. Eliminating all market volatility

Explanation

Hedgers use derivatives to shift unwanted price risk to counterparties willing to bear it, usually speculators. The market does not remove volatility itself, nor does it guarantee profits. Financing is a separate function of other markets.

Question 9Derivatives fundamentals and market structure

An investor holds 1,000 shares and buys one put option with a strike of £5.00 when the share price is £5.20. What does the put provide?

  1. A right to buy additional shares at £5.00
  2. An obligation to sell the shares at £5.00
  3. Protection against the share price falling below £5.00 Correct answer.
  4. A guaranteed gain if the share price rises above £5.20

Explanation

A long put gives the right to sell at the strike, so it sets a floor on the value of the holding. The investor keeps the shares and any upside. It is a right, not an obligation, and it does not create a purchase right.

Question 10Derivatives fundamentals and market structure

A futures contract on an index has a multiplier of £10 per point. A trader buys at 4,000 and closes at 4,050. What is the profit?

  1. £500 Correct answer.
  2. £5,000
  3. £10
  4. £50

Explanation

The index moved 50 points in the trader's favour, and each point is worth £10. Multiplying 50 by £10 gives £500. The multiplier converts index points into a cash amount.

Question 11Derivatives fundamentals and market structure

Which statement best describes the role of a speculator in a derivatives market?

  1. They seek to remove price risk from their balance sheet
  2. They set official settlement prices for exchanges
  3. They guarantee performance for clearing members
  4. They accept price risk in the hope of profit Correct answer.

Explanation

Speculators take on risk that hedgers wish to shed, aiming to profit from directional or relative price moves. They provide liquidity and counterparties. They do not set settlement prices or guarantee performance.

Question 12Derivatives fundamentals and market structure

A company will receive a known amount of a foreign currency in three months and fears the currency will weaken. Which forward action hedges this exposure?

  1. Sell the foreign currency forward Correct answer.
  2. Buy the foreign currency spot
  3. Buy the foreign currency forward
  4. Buy a call on the foreign currency

Explanation

A future receipt of foreign currency creates a long exposure, so selling that currency forward locks in an exchange rate for the receipt. Buying forward would add to the exposure. A call would protect against the currency strengthening, which is not the risk described.

Question 13Derivatives fundamentals and market structure

What happens when a futures position is marked to market daily?

  1. Gains and losses are credited or debited to the margin account Correct answer.
  2. The contract price is fixed for the life of the trade
  3. The contract is automatically rolled to the next expiry
  4. The initial margin is returned to the trader

Explanation

Daily settlement credits profits and debits losses to the margin account based on the closing settlement price. This keeps the account aligned with current market value. It does not roll contracts or return margin.

Question 14Derivatives fundamentals and market structure

Which best explains why a futures price converges to the spot price as expiry approaches?

  1. Delivery obligations and arbitrage force the two prices together Correct answer.
  2. The underlying asset stops trading before expiry
  3. Margin requirements are removed at expiry
  4. The exchange fixes the futures price at expiry

Explanation

At expiry the futures contract becomes a claim on the underlying, so any gap between futures and spot would create a riskless arbitrage. Trading and delivery obligations therefore pull the prices together. The exchange does not arbitrarily set the price.

Question 15Derivatives fundamentals and market structure

A trader is short a call option and the underlying price rises sharply above the strike. What is the trader's exposure?

  1. Loss limited to the premium received
  2. A profit equal to the premium received
  3. Potentially unlimited loss as the underlying rises Correct answer.
  4. No exposure because the option was sold

Explanation

A short call obliges the writer to deliver at the strike if exercised, and the underlying can rise without limit. The writer's loss therefore grows as the price rises. The premium received only partially offsets that loss.

Question 16Derivatives fundamentals and market structure

What is the main purpose of a central counterparty in derivatives clearing?

  1. To set the underlying asset's market price
  2. To lend money to hedgers for margin payments
  3. To interpose itself between counterparties and manage default risk Correct answer.
  4. To advise clients on which contracts to trade

Explanation

A central counterparty novates trades and becomes the buyer to every seller and seller to every buyer. It manages counterparty default risk through margin and default funds. It does not set prices, lend to clients or give advice.

Question 17Derivatives fundamentals and market structure

An investor buys a call with a strike of £10 for a premium of £0.80. At expiry the share price is £11.20. What is the net profit per share?

  1. £0.40 Correct answer.
  2. £0.80
  3. £2.00
  4. £1.20

Explanation

Intrinsic value at expiry is £11.20 minus £10.00, which equals £1.20. Subtracting the £0.80 premium paid gives a net profit of £0.40 per share. The premium must be deducted to find the true profit.

Question 18Derivatives fundamentals and market structure

Which statement about the settlement of exchange-traded derivatives is correct?

  1. Settlement is always negotiated bilaterally after expiry
  2. Some contracts are cash settled while others involve physical delivery Correct answer.
  3. All exchange-traded derivatives are cash settled
  4. All exchange-traded derivatives require physical delivery

Explanation

Exchanges specify settlement method per contract, so index futures are typically cash settled while some commodity or bond futures allow physical delivery. The method is defined in the contract specification. Bilateral negotiation is a feature of OTC trading.

Question 19Derivatives fundamentals and market structure

A portfolio manager wants to reduce equity exposure quickly without selling the underlying shares. Which action achieves this?

  1. Buy the underlying shares on margin
  2. Buy stock index futures
  3. Sell stock index futures Correct answer.
  4. Buy a put option and sell a call at the same strike

Explanation

Selling index futures creates a short exposure that offsets the long equity portfolio, reducing market risk without selling shares. Buying futures would increase exposure. Buying shares adds to the exposure being hedged.

Question 20Derivatives fundamentals and market structure

Which factor most directly determines the fair value of a futures contract relative to the spot price?

  1. The exchange's trading hours
  2. The historical volatility of the underlying
  3. The number of market participants
  4. The cost of carry, including financing and storage Correct answer.

Explanation

The futures price reflects the spot price plus the net cost of carrying the underlying to delivery, covering financing, storage and income. This relationship underpins fair value. Volatility affects option prices rather than the basic carry relationship.

Question 21Derivatives fundamentals and market structure

A futures trader holds a long position and the exchange raises the initial margin requirement. What is the most likely immediate consequence?

  1. The trader must deposit additional collateral to maintain the position Correct answer.
  2. The trader's contract is automatically cancelled
  3. The trader receives a refund of the original margin
  4. The futures price is adjusted to reflect the new margin

Explanation

If margin requirements rise, the account must meet the higher collateral level, usually through an additional deposit. Failure to do so can lead to liquidation, but cancellation is not automatic. Margin changes do not alter the contract price.

Question 22Derivatives fundamentals and market structure

An investor sells a put option on a share with a strike of £8 for a premium of £0.50. The share price falls to £6 at expiry. What is the loss per share?

  1. £1.50 Correct answer.
  2. £2.00
  3. £2.50
  4. £0.50

Explanation

The short put is exercised, obliging the writer to buy at £8 when the share is worth £6, a loss of £2.00. The £0.50 premium received reduces the net loss to £1.50. The premium is a partial offset, not the whole outcome.

Question 23Derivatives fundamentals and market structure

Two futures contracts on the same underlying have different expiries. Which statement about their prices is most consistent with a normal, upward-sloping curve?

  1. The longer-dated contract trades below the shorter-dated one
  2. The longer-dated contract must equal the spot price
  3. Both contracts must trade at the same price
  4. The longer-dated contract trades above the shorter-dated one Correct answer.

Explanation

When the cost of carry is positive, longer-dated futures trade above shorter-dated ones, producing an upward-sloping curve known as contango. The spread reflects the additional carrying cost over the longer period. Equal prices would imply no net carry.

Question 24Derivatives fundamentals and market structure

A hedger with a long physical position uses a short futures hedge that is lifted before expiry. Which risk remains if the futures and spot prices do not move perfectly together?

  1. Basis risk Correct answer.
  2. Settlement risk
  3. Operational risk
  4. Credit risk

Explanation

Basis risk arises because the difference between the futures price and the spot price can change before the hedge is closed. It is the residual risk of an imperfect hedge. Credit, operational and settlement risks are separate categories.

Question 25Derivatives fundamentals and market structure

An investor creates a bull call spread by buying a call at strike £20 and selling a call at strike £25. Which statement about the position is correct?

  1. The position profits most if the share price falls below £20
  2. Maximum gain is unlimited because a call was bought
  3. Maximum loss is unlimited if the share price rises
  4. Maximum loss is the net premium paid and maximum gain is capped at £5 less that premium Correct answer.

Explanation

The purchased call gives upside exposure up to £25, while the written call caps gains above that level. The net premium paid is the most that can be lost. Because the short call offsets gains beyond £25, upside is limited.

Question 26Derivatives fundamentals and market structure

A futures contract is described as 'standardised'. Which feature is set by the exchange rather than negotiated by the two parties?

  1. The trading strategy of each participant
  2. The credit standing of each counterparty
  3. The commission charged by each party's broker
  4. The delivery month and contract size Correct answer.

Explanation

Exchange-traded futures are standardised, meaning the exchange fixes the contract specifications such as the underlying quantity, quality, delivery months and tick size. Because every contract of a given series is identical, positions can be offset easily and the market is liquid. Commission and strategy are matters for individual participants, not contract terms.

Question 27Derivatives fundamentals and market structure

Which instrument gives the buyer a right, but not an obligation, to trade the underlying at a fixed price on or before a future date?

  1. A forward contract
  2. A futures contract
  3. A swap agreement
  4. An option contract Correct answer.

Explanation

An option confers a right without obligation on the holder, who pays a premium for that asymmetry. Forwards, futures and swaps are all binding agreements in which both parties are obliged to perform. Only the option buyer may choose not to exercise.

Question 28Derivatives fundamentals and market structure

A clearing member deposits initial margin with the clearing house. What is the primary purpose of this margin?

  1. To cover potential future losses on the position before they arise Correct answer.
  2. To pay the exchange's annual listing fee
  3. To guarantee the broker a minimum profit
  4. To fund the option premium owed to the seller

Explanation

Initial margin is collateral held to protect the clearing house against the risk that a member defaults before the position can be closed out. It is not a fee or a payment for the trade itself. Variation margin then settles the daily profit and loss.

Question 29Derivatives fundamentals and market structure

Which participant uses derivatives specifically to remove an existing price exposure arising from a commercial activity?

  1. An arbitrageur
  2. A day trader
  3. A market maker
  4. A hedger Correct answer.

Explanation

A hedger holds an underlying commercial exposure, such as a physical commodity or a foreign currency receivable, and uses derivatives to offset that risk. Arbitrageurs and market makers seek to profit from price relationships rather than to reduce an existing exposure. Day traders take directional risk for profit.

Question 30Derivatives fundamentals and market structure

An exchange-traded derivative differs from an over-the-counter derivative in that the exchange-traded contract is:

  1. standardised and cleared through a central counterparty Correct answer.
  2. free of any margin requirement
  3. negotiated privately between the two parties
  4. settled only at final maturity

Explanation

Exchange-traded derivatives use standardised terms and are novated to a central counterparty, which manages counterparty risk. OTC contracts are privately negotiated and carry bilateral credit exposure. Exchange trades are also typically margined and can be closed out before maturity.

Question 31Derivatives fundamentals and market structure

A trader buys a futures contract at 250 and later sells it at 262. The contract multiplier is £20 per point. Ignoring costs, what is the profit?

  1. £260
  2. £240 Correct answer.
  3. £12
  4. £120

Explanation

The price gain is 262 minus 250, which equals 12 points. Multiplying by the £20 per point multiplier gives a profit of £240. The multiplier converts index or price points into a cash amount.

Question 32Derivatives fundamentals and market structure

Which party to an option contract receives the premium?

  1. The buyer of the option
  2. The clearing house
  3. The writer of the option Correct answer.
  4. The exchange regulator

Explanation

The option writer, also called the seller, grants the right to the buyer and is paid the premium in return for accepting the obligation. The buyer pays the premium to acquire the right. The clearing house and regulator do not receive the premium as a party to the trade.

Question 33Derivatives fundamentals and market structure

What does 'open interest' measure in a derivatives market?

  1. The number of contracts traded during the latest session
  2. The number of outstanding contracts that have not been closed or delivered Correct answer.
  3. The number of participants registered with the exchange
  4. The total value of margin held by the clearing house

Explanation

Open interest counts contracts that remain outstanding, meaning positions that have been opened but not yet offset or settled by delivery. It is distinct from volume, which counts trades executed in a period. Rising open interest indicates new money entering the market.

Question 34Derivatives fundamentals and market structure

A UK company knows it must pay US$1 million in three months and wants to fix the sterling cost today. Which derivative achieves this?

  1. Buying a sterling call option
  2. Entering a forward contract to buy US dollars Correct answer.
  3. Selling a US dollar futures contract
  4. Buying a put option on sterling

Explanation

The company is short US dollars in the future, so a forward to buy dollars at a fixed rate locks in the sterling cost and removes currency uncertainty. The forward obliges both parties to exchange at the agreed rate on the value date. Options could cap the cost but would require a premium and leave the outcome uncertain.

Question 35Derivatives fundamentals and market structure

An investor holds a long futures position of five contracts. The exchange raises the initial margin requirement per contract. What is the most direct consequence for the investor?

  1. The investor must post additional collateral to maintain the position Correct answer.
  2. The investor's position is automatically closed by the exchange
  3. The futures price is adjusted downward by the exchange
  4. The investor becomes entitled to a larger variation margin credit

Explanation

Higher initial margin means more collateral must be deposited per contract, so the investor must fund the shortfall to keep the position open. The exchange does not close positions or adjust prices because of a margin change. Variation margin reflects actual price moves, not the margin rate.

Question 36Derivatives fundamentals and market structure

The spot price of an asset is £100 and the one-year risk-free rate is 5%. Storage and income are zero. Assuming no arbitrage, what is the fair one-year futures price?

  1. £105.00 Correct answer.
  2. £95.24
  3. £100.00
  4. £110.25

Explanation

The cost-of-carry relationship sets the futures price at the spot price compounded at the risk-free rate: 100 multiplied by 1.05 equals £105.00. Any other price would permit arbitrage between the cash and futures markets. Storage costs would raise this figure and income would lower it.

Question 37Derivatives fundamentals and market structure

Which statement about the exercise of a standard exchange-traded equity option is correct?

  1. Exercise requires the agreement of the clearing house and the writer
  2. Exercise can only occur on the expiry date for an American-style option
  3. The writer chooses whether to honour the exercise
  4. The holder may exercise on any business day up to expiry for an American-style option Correct answer.

Explanation

An American-style option allows the holder to exercise at any time up to and including expiry, whereas a European-style option can be exercised only at expiry. The holder alone decides whether to exercise. The writer has no discretion and must perform if assigned.

Question 38Derivatives fundamentals and market structure

A speculator expects a sharp fall in an equity index and wants unlimited profit potential from the view with a defined maximum loss. Which position fits best?

  1. Selling a call option
  2. Buying a call option
  3. Buying a put option Correct answer.
  4. Selling a put option

Explanation

A long put gains as the underlying falls, with profit potential limited only by the index reaching zero, and the maximum loss is the premium paid. Selling a call also profits from a fall but carries unlimited loss if the index rises. The other positions profit from a rise.

Question 39Derivatives fundamentals and market structure

What is the main economic effect of daily mark-to-market on a futures position?

  1. It defers all profit and loss until the contract expires
  2. It removes the need for any margin to be posted
  3. It fixes the contract price for the life of the trade
  4. It converts unrealised gains and losses into daily cash flows Correct answer.

Explanation

Marking to market revalues the position against the daily settlement price and credits or debits variation margin, so gains and losses become realised in cash each day. This reduces accumulated counterparty exposure compared with a forward. It does not remove margin requirements or change the original trade price.

Question 40Derivatives fundamentals and market structure

An investor buys a share at £4.00 and simultaneously buys a put with a strike of £4.00, paying a premium of £0.30. What is the maximum loss on the combined position?

  1. £4.00 per share
  2. £0.30 per share Correct answer.
  3. £3.70 per share
  4. Unlimited

Explanation

The protective put floors the sale proceeds at the £4.00 strike, so a fall in the share price is offset by the put's gain. The only unrecovered cost is the premium of £0.30, which is the maximum loss. This combination is known as a protective put.

Question 41Derivatives fundamentals and market structure

Which best describes basis risk for a hedger using futures?

  1. The risk that the hedger forgets to post initial margin
  2. The risk that the exchange suspends trading
  3. The risk that the futures price and the hedged cash price do not move together perfectly Correct answer.
  4. The risk that the clearing house defaults on variation margin

Explanation

Basis is the difference between the futures price and the cash price of the hedged exposure. Because the two may not converge perfectly, particularly if the underlying differs in grade, location or timing, the hedge may not fully offset the cash loss. This residual uncertainty is basis risk.

Question 42Derivatives fundamentals and market structure

A trader sells one futures contract at 500 and the settlement price on the first day is 490. The multiplier is £50 per point and initial margin was £3,000. What is the effect on the trader's margin account, ignoring other items?

  1. A debit of £500
  2. A debit of £50
  3. A credit of £50
  4. A credit of £500 Correct answer.

Explanation

The trader is short, so a fall in the settlement price from 500 to 490 produces a gain of 10 points. Multiplying by £50 gives a £500 credit to the margin account through variation margin. A short position loses when prices rise.

Question 43Derivatives fundamentals and market structure

Which feature distinguishes a swap from a series of forward contracts?

  1. A swap exchanges periodic cash flows over an agreed term Correct answer.
  2. A swap is always traded on an exchange
  3. A swap requires no credit assessment of the counterparty
  4. A swap involves a single exchange of principal at maturity only

Explanation

A swap is an agreement to exchange periodic cash flows, such as fixed for floating interest, over a defined term. It can be viewed as a portfolio of forwards but is documented as a single agreement. Most swaps are OTC and therefore carry counterparty credit exposure.

Question 44Derivatives fundamentals and market structure

An investor buys a call with a strike of £50 for a premium of £3. At expiry the underlying is £56. What is the net profit per share?

  1. £9
  2. £3 Correct answer.
  3. £0
  4. £6

Explanation

The call's intrinsic value at expiry is £56 minus £50, which is £6. Subtracting the £3 premium paid gives a net profit of £3 per share. The breakeven price for the buyer is the strike plus the premium, at £53.

Question 45Derivatives fundamentals and market structure

Which factor most directly explains why a futures price is normally above the spot price for a storable commodity with positive storage costs?

  1. The cost of carrying the commodity to delivery Correct answer.
  2. The absence of any interest rate
  3. The expectation that the commodity will fall in value
  4. The number of traders holding long positions

Explanation

The futures price reflects the cost of carry, which includes financing, storage and insurance, less any income from the asset. Positive storage costs raise the futures price above spot in a contango market. Expectations of a fall would not by themselves create a positive carry relationship.

Question 46Derivatives fundamentals and market structure

A portfolio manager wants to reduce market exposure temporarily without selling shares. The manager sells index futures but the portfolio's beta is 1.4 while the index beta is 1.0. What adjustment is needed to the number of contracts?

  1. Use the portfolio's dividend yield instead of beta
  2. Ignore beta because futures track the index
  3. Divide the unadjusted hedge by 1.4
  4. Multiply the unadjusted hedge by 1.4 Correct answer.

Explanation

The number of contracts needed is proportional to the portfolio's beta relative to the index, so a beta of 1.4 requires 1.4 times the contracts of a beta-1.0 portfolio of the same value. This scales the hedge to the portfolio's sensitivity to index moves. Ignoring beta would leave the portfolio under-hedged.

Question 47Derivatives fundamentals and market structure

Two call options have the same strike and expiry but different underlying volatilities. Which statement is most consistent with option pricing theory?

  1. The lower-volatility option has the higher premium
  2. The higher-volatility option has the higher premium Correct answer.
  3. Volatility affects only put options
  4. Both options must have identical premiums

Explanation

Greater volatility widens the distribution of possible outcomes, increasing the expected payoff of an option while its downside remains capped at the premium. The option with higher implied volatility therefore commands a higher premium. Volatility affects both calls and puts.

Question 48Derivatives fundamentals and market structure

An arbitrageur observes a futures price below the fair cost-of-carry value with no transaction costs. Which action is consistent with arbitrage?

  1. Buy the futures and sell the underlying short Correct answer.
  2. Buy both the futures and the underlying
  3. Sell the futures and buy the underlying
  4. Do nothing because arbitrage is impossible

Explanation

If the futures is cheap relative to its fair carry value, the arbitrageur buys the futures and shorts the underlying, locking in the difference as the two converge. This is a cash-and-carry in reverse. Selling the futures and buying the underlying would be appropriate if the futures were rich.

Question 49Derivatives fundamentals and market structure

A trader is long a call and short a put with the same strike and expiry. Which exposure does this combination create?

  1. A payoff equivalent to a short forward position
  2. A position that profits only if the price is unchanged
  3. A position with no market exposure
  4. A payoff equivalent to a long forward position Correct answer.

Explanation

A long call plus a short put with the same strike and expiry replicates a long forward: the combined payoff rises one-for-one with the underlying above the strike and falls below it. The premium received on the put partly offsets the call premium. The result is a synthetic long position, not a neutral one.

Question 50Derivatives fundamentals and market structure

A company has a floating-rate loan and enters a pay-fixed, receive-floating interest rate swap. Which risk is it primarily managing?

  1. Currency translation risk
  2. The risk of falling interest rates on its borrowing cost
  3. The risk of a fall in the value of its equity
  4. The risk of rising interest rates on its borrowing cost Correct answer.

Explanation

Paying fixed and receiving floating converts a floating-rate liability into an effectively fixed-rate one, so the company is protected if rates rise. It gives up the benefit of falling rates in exchange for certainty. Currency and equity risks are not addressed by an interest rate swap.