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CCM Derivatives study materials
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CCM Derivatives practice questions

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Question 1Derivatives Fundamentals and Market Structure

Which position gains value when the underlying asset's price rises?

  1. Long call Correct answer.
  2. Short put
  3. Long put
  4. Short call

Explanation

A call gives its holder the right to buy at a fixed strike, so its value increases as the underlying rises. Long puts and short calls both lose value when the underlying rises.

Question 2Derivatives Fundamentals and Market Structure

A futures contract differs from a forward contract primarily because a futures contract is:

  1. Free of any margin requirement
  2. Negotiated privately between two parties
  3. Standardized and cleared through an exchange Correct answer.
  4. Settled only at final maturity

Explanation

Futures are exchange-traded, standardized contracts cleared by a central counterparty, which is the key structural difference from privately negotiated forwards. Forwards are bilateral and typically settled at maturity.

Question 3Derivatives Fundamentals and Market Structure

The buyer of an option pays a premium and receives:

  1. Ownership of the underlying asset
  2. An obligation to transact at expiry
  3. A right, but not an obligation, to transact Correct answer.
  4. A guarantee of profit if held to expiry

Explanation

Option buyers acquire a right without obligation, which is why they pay a premium. Only the option seller carries an obligation.

Question 4Derivatives Fundamentals and Market Structure

Which party bears the obligation to deliver the underlying asset if a call option is exercised?

  1. The clearing house
  2. The exchange's regulator
  3. The call writer Correct answer.
  4. The call buyer

Explanation

The writer of a call is obligated to sell (deliver) the underlying when the buyer exercises. The buyer holds only a right.

Question 5Derivatives Fundamentals and Market Structure

Initial margin on a futures position is best described as:

  1. A fee paid to the broker for executing the trade
  2. A performance bond posted to support the position Correct answer.
  3. The maximum loss the position can incur
  4. A tax levied on derivative transactions

Explanation

Initial margin is collateral, often called a performance bond, that supports the position and is returned when the position closes. It is not a transaction fee or a cap on losses.

Question 6Derivatives Fundamentals and Market Structure

A swap is a derivative contract that primarily involves:

  1. Buying an asset for immediate delivery
  2. Lending securities to a counterparty
  3. Purchasing insurance against default
  4. Exchanging periodic cash flows between two parties Correct answer.

Explanation

Swaps exchange streams of cash flows, such as fixed for floating interest payments, over a defined period. They are not spot purchases or insurance policies.

Question 7Derivatives Fundamentals and Market Structure

In a centrally cleared derivative transaction, the central counterparty (CCP) interposes itself by:

  1. Guaranteeing profits for both parties
  2. Acting as the broker for retail clients
  3. Becoming the buyer to every seller and seller to every buyer Correct answer.
  4. Setting the market price of the contract

Explanation

Novation makes the CCP the counterparty to both sides, replacing bilateral credit exposure with CCP exposure. The CCP does not set prices or guarantee profits.

Question 8Derivatives Fundamentals and Market Structure

The intrinsic value of an option is:

  1. The amount it would be worth if exercised immediately Correct answer.
  2. The option's sensitivity to volatility
  3. The time remaining until expiry
  4. The premium paid at purchase

Explanation

Intrinsic value measures the payoff available from immediate exercise, ignoring time value. Premium equals intrinsic plus time value.

Question 9Derivatives Fundamentals and Market Structure

An investor buys one call with a strike of 50 for a premium of 3. At expiry the underlying is 58. What is the investor's profit per share?

  1. 8
  2. 3
  3. 5 Correct answer.
  4. 0

Explanation

Payoff at expiry is 58 minus 50, equal to 8. Profit subtracts the premium of 3, leaving 5.

Question 10Derivatives Fundamentals and Market Structure

A put with a strike of 40 is bought for a premium of 2. At expiry the underlying is 31. What is the profit per share?

  1. 2
  2. 0
  3. 9
  4. 7 Correct answer.

Explanation

Payoff is 40 minus 31, equal to 9. Profit is 9 minus the 2 premium, giving 7.

Question 11Derivatives Fundamentals and Market Structure

A stock trades at 100. A one-year forward is priced at 106 and the risk-free rate is 4 percent with no dividends. Which arbitrage is available?

  1. Sell the forward, buy the stock, and borrow at the risk-free rate Correct answer.
  2. Do nothing, since the forward is fairly priced
  3. Buy the forward and buy the stock
  4. Buy the forward, short the stock, and lend at the risk-free rate

Explanation

The fair forward is 100 times 1.04, equal to 104, so the 106 forward is rich. Selling the forward, buying the stock with borrowed funds, and delivering at expiry locks in a riskless gain.

Question 12Derivatives Fundamentals and Market Structure

A trader holds a long futures position of 10 contracts, each with a multiplier of 100. The price falls by 2 per unit. What is the variation margin call?

  1. 1,000
  2. 200
  3. 20
  4. 2,000 Correct answer.

Explanation

Loss equals 10 contracts times 100 multiplier times 2, giving 2,000. Daily settlement collects this from the long and pays it to the short.

Question 13Derivatives Fundamentals and Market Structure

A call is deep in the money and near expiry. Its delta is closest to:

  1. -1.0
  2. 1.0 Correct answer.
  3. 0.0
  4. 0.5

Explanation

Deep in-the-money calls behave almost like the underlying, so delta approaches 1.0. At-the-money delta is near 0.5 and out-of-the-money delta approaches zero.

Question 14Derivatives Fundamentals and Market Structure

A company expects to borrow at a floating rate but prefers fixed-rate certainty. Which swap position achieves this?

  1. Pay floating and receive fixed
  2. Pay fixed and receive floating Correct answer.
  3. Pay fixed and pay floating
  4. Receive fixed and receive floating

Explanation

Paying fixed converts floating exposure into a fixed obligation, while the floating receipt offsets the loan's floating payments. Receiving fixed would add to floating exposure.

Question 15Derivatives Fundamentals and Market Structure

A put option has a strike of 60 and the underlying trades at 55. The put is:

  1. In the money by 60
  2. Out of the money by 5
  3. At the money
  4. In the money by 5 Correct answer.

Explanation

A put is in the money when the underlying is below the strike. The intrinsic amount is 60 minus 55, equal to 5.

Question 16Derivatives Fundamentals and Market Structure

A futures contract on an index has a multiplier of 50 and the index is at 4,000. What is the notional value of one contract?

  1. 200,000 Correct answer.
  2. 4,050
  3. 4,000
  4. 80

Explanation

Notional value equals index level times multiplier, or 4,000 times 50, equal to 200,000. This is the exposure controlled per contract.

Question 17Derivatives Fundamentals and Market Structure

A hedger who is long the physical asset and shorts futures to offset price risk is executing:

  1. A calendar spread
  2. A short hedge Correct answer.
  3. A long hedge
  4. A covered call

Explanation

A short hedge offsets a long physical position by selling futures, so losses on the asset are offset by gains on the futures. A long hedge is used by parties who will buy the asset later.

Question 18Derivatives Fundamentals and Market Structure

The cost-of-carry model prices a futures contract as the spot price plus:

  1. The option premium
  2. The exchange fee
  3. The bid-ask spread
  4. Carrying costs less any income from the asset Correct answer.

Explanation

Cost of carry adds financing and storage costs and subtracts income such as dividends or coupons. Option premiums and transaction fees are not part of the theoretical relation.

Question 19Derivatives Fundamentals and Market Structure

A trader sells a put with a strike of 30 for a premium of 2. At expiry the underlying is 24. What is the trader's profit or loss per share?

  1. Profit of 2
  2. Loss of 4 Correct answer.
  3. Profit of 6
  4. Loss of 8

Explanation

The short put pays 30 minus 24, equal to 6, to the holder but kept the 2 premium, so the net result is a loss of 4. The premium only partly offsets the payoff.

Question 20Derivatives Fundamentals and Market Structure

Which feature most distinguishes an American option from a European option?

  1. Exchange listing
  2. Contract standardization
  3. Cash settlement at expiry
  4. Early exercise before expiry Correct answer.

Explanation

American options may be exercised at any time up to expiry, while European options only at expiry. Settlement style and listing do not define the distinction.

Question 21Derivatives Fundamentals and Market Structure

An investor holds a long straddle. The position profits most when:

  1. The underlying stays exactly at the strike
  2. Time to expiry lengthens with no price move
  3. The underlying moves sharply in either direction Correct answer.
  4. Implied volatility collapses

Explanation

A long straddle combines a long call and long put at the same strike, so large moves in either direction produce gains. It loses when the underlying stagnates or volatility falls.

Question 22Derivatives Fundamentals and Market Structure

A futures position is marked to market daily. A trader with a long position who cannot meet a variation margin call will typically face:

  1. Conversion of the position into a forward
  2. Forced liquidation of the position Correct answer.
  3. Waiver of the loss by the clearing house
  4. Automatic extension of credit by the exchange

Explanation

Failure to meet margin calls triggers close-out or forced liquidation by the broker or clearing member. Losses are not waived, and futures cannot be converted into forwards.

Question 23Derivatives Fundamentals and Market Structure

A stock pays no dividends and trades at 80. The one-year risk-free rate is 5 percent. A one-year European call with a strike of 80 trades at 9 while the matching put trades at 4. Using put-call parity, the most likely conclusion is:

  1. The put is overpriced relative to the call
  2. Parity cannot be applied without dividends
  3. The call is overpriced relative to the put Correct answer.
  4. Both options are fairly priced

Explanation

Parity gives call minus put equal to spot minus the present value of the strike, or 80 minus 76.19, about 3.81. The observed call minus put is 5, so the call is rich relative to the put.

Question 24Derivatives Fundamentals and Market Structure

A portfolio manager wants to reduce equity exposure without selling shares. Which derivative action best accomplishes this?

  1. Buy index futures against the portfolio
  2. Buy index puts and sell index calls at the same strike
  3. Sell index futures against the portfolio Correct answer.
  4. Sell index puts against the portfolio

Explanation

Shorting index futures creates an offsetting exposure that lowers the portfolio's net beta without disturbing the underlying holdings. Buying futures or selling puts would increase exposure.

Question 25Derivatives Fundamentals and Market Structure

Implied volatility rises sharply while the underlying price is unchanged. Which statement best describes the effect on an at-the-money long call?

  1. Its value increases because time value expands Correct answer.
  2. Its value falls because intrinsic value declines
  3. Its value is unchanged because intrinsic value is fixed
  4. Its value falls because delta decreases

Explanation

With price and strike unchanged, intrinsic value is zero and the option's value is entirely time value, which rises with implied volatility. Delta typically rises with volatility for calls rather than falling.

Question 26Derivatives Fundamentals and Market Structure

Which statement best describes a key difference between exchange-traded derivatives and over-the-counter (OTC) derivatives?

  1. Exchange-traded derivatives are standardized and cleared, while OTC derivatives are privately negotiated and carry counterparty risk. Correct answer.
  2. Exchange-traded derivatives are not subject to any regulatory oversight, while OTC derivatives are heavily regulated.
  3. OTC derivatives are only available to retail investors, while exchange-traded derivatives are for institutions.
  4. Exchange-traded derivatives always have longer maturities than OTC derivatives.

Explanation

Exchange-traded derivatives are standardized contracts traded on organized exchanges and typically cleared through a central counterparty, which reduces counterparty risk. OTC derivatives are customized contracts negotiated directly between parties and thus expose each party to the other's credit risk.

Question 27Derivatives Fundamentals and Market Structure

A futures contract on a commodity has a contract size of 5,000 bushels. The current futures price is $4.50 per bushel. What is the notional value of one contract?

  1. $2,250
  2. $22,500 Correct answer.
  3. $45,000
  4. $4,500

Explanation

The notional value is calculated as the contract size multiplied by the futures price: 5,000 bushels × $4.50 = $22,500.

Question 28Derivatives Fundamentals and Market Structure

An investor buys a call option with a strike price of $50 and pays a premium of $4. At expiration, the underlying asset is priced at $58. What is the investor's profit per share?

  1. $4 Correct answer.
  2. $8
  3. $12
  4. $0

Explanation

Profit for a long call is the maximum of (underlying price at expiry minus strike price) minus premium, or negative premium if the option expires worthless. Here, (58 − 50) − 4 = $4.

Question 29Derivatives Fundamentals and Market Structure

A trader holds a short position in a futures contract. The initial margin is $5,000, and the maintenance margin is $3,500. Due to an adverse price move, the margin account balance falls to $3,200. What is the amount of the margin call?

  1. $5,000
  2. $1,500
  3. $300
  4. $1,800 Correct answer.

Explanation

A margin call is triggered when the account balance falls below the maintenance margin. The amount required is the difference between the initial margin and the current balance: $5,000 − $3,200 = $1,800.

Question 30Derivatives Fundamentals and Market Structure

A stock is currently priced at $100. A one-year European call option with a strike price of $100 is trading at $10. The risk-free interest rate is 5% per year, and the stock pays no dividends. Assuming no arbitrage, what is the price of a one-year European put option with the same strike?

  1. $4.88
  2. $10.00
  3. $15.13
  4. $5.13 Correct answer.

Explanation

Using put-call parity: C + PV(K) = P + S. Here, PV(K) = 100 / 1.05 ≈ 95.24. So P = C + PV(K) − S = 10 + 95.24 − 100 = $5.24, which is closest to $5.13 (difference due to rounding).

Question 31Interest Rate Risk and Hedging Instruments

A corporate treasurer expects to issue five-year fixed-rate debt in three months and wants to lock in today's rate. Which instrument most directly hedges the risk that rates rise before issuance?

  1. Sell a receiver swaption
  2. Enter a reverse repo
  3. Buy a payer swaption Correct answer.
  4. Buy a receiver swaption

Explanation

A payer swaption gives the right to pay fixed, which gains value when rates rise and offsets higher coupon cost at issuance. A receiver swaption benefits from falling rates and hedges the opposite exposure.

Question 32Interest Rate Risk and Hedging Instruments

In a standard plain-vanilla interest rate swap, the floating leg is most commonly reset and paid by reference to which rate?

  1. The ten-year Treasury yield
  2. The prime rate
  3. A term SOFR rate Correct answer.
  4. The federal funds target range

Explanation

Plain-vanilla swaps reference a short-tenor floating index such as three- or six-month term SOFR, reset periodically against the fixed leg. Long Treasury yields and policy ranges are not the standard floating index.

Question 33Interest Rate Risk and Hedging Instruments

A fixed-rate payer in an interest rate swap benefits when which condition occurs?

  1. The counterparty's credit spread widens
  2. The floating index falls below the fixed rate
  3. The floating index rises above the fixed rate Correct answer.
  4. The swap's fixed rate rises after execution

Explanation

The payer receives floating and pays fixed, so net cash flow improves as the floating index exceeds the fixed rate. A falling index reduces the received leg and hurts the payer.

Question 34Interest Rate Risk and Hedging Instruments

Which statement best describes the duration profile of a payer interest rate swap?

  1. It has negative duration because it gains when rates rise Correct answer.
  2. It has zero duration at inception by construction
  3. It has positive duration equal to the floating leg
  4. Its duration equals the fixed leg minus the floating leg

Explanation

Paying fixed and receiving floating behaves like a short position in a fixed-rate bond, so the swap loses value when rates fall and gains when rates rise, giving negative duration. The floating leg has negligible duration because it resets to par.

Question 35Interest Rate Risk and Hedging Instruments

A borrower with a floating-rate loan wants to convert to fixed and simultaneously wants to retain the ability to benefit if rates fall. Which structure fits best?

  1. A written interest rate floor
  2. A short payer swap
  3. A long receiver swap
  4. A purchased interest rate cap Correct answer.

Explanation

A cap pays the borrower when the index exceeds the strike, capping the effective cost while leaving downside benefit if rates fall. It is an option, so the borrower pays premium but keeps the upside.

Question 36Interest Rate Risk and Hedging Instruments

An interest rate cap is economically equivalent to which combination of instruments?

  1. A series of payer swaptions Correct answer.
  2. A series of receiver swaptions
  3. A single payer swaption
  4. A series of forward rate agreements plus a floor

Explanation

A cap is a portfolio of caplets, and each caplet behaves like a payer swaption expiring on the corresponding reset date. The strip of payer swaptions replicates the cap's payoff profile.

Question 37Interest Rate Risk and Hedging Instruments

A firm buys an interest rate floor with a 3.00% strike on a notional of 50 million for one period. If the reference rate settles at 2.40%, what is the approximate payoff for that period?

  1. 300,000 Correct answer.
  2. 0
  3. 150,000
  4. 750,000

Explanation

A floor pays the strike minus the reference rate, floored at zero, times notional: (3.00% - 2.40%) x 50,000,000 = 300,000 before any day-count or discounting adjustment. The payoff is positive because the rate fell below the strike.

Question 38Interest Rate Risk and Hedging Instruments

Which statement about a collar is accurate?

  1. It requires no premium outlay in every case
  2. It removes all interest rate exposure
  3. It combines a bought cap and a written floor Correct answer.
  4. It combines a written cap and a bought floor

Explanation

A collar pairs a purchased cap with a sold floor, limiting both the maximum and minimum effective rate. The floor premium offsets part or all of the cap cost, but the net premium is not necessarily zero.

Question 39Interest Rate Risk and Hedging Instruments

Under a two-year quarterly-reset interest rate swap, the floating leg payment for a period is determined primarily by which quantity?

  1. The fixed rate set at inception
  2. The average of the fixed and floating rates
  3. The floating index observed at the start of the period Correct answer.
  4. The floating index observed at the end of the period

Explanation

In the standard advanced-set convention the floating rate is fixed at the beginning of each accrual period and paid at the end. The fixed rate is constant and does not set the floating payment.

Question 40Interest Rate Risk and Hedging Instruments

The par swap rate is best described as which of the following?

  1. The fixed rate that makes the swap's initial value zero Correct answer.
  2. The fixed rate equal to the long-term Treasury yield
  3. The floating index level at inception
  4. The credit spread over the floating index

Explanation

The par rate equates the present value of the fixed leg to the present value of the floating leg, so the swap has zero value at inception. It is derived from the term structure of discount factors, not from a single index or Treasury level.

Question 41Interest Rate Risk and Hedging Instruments

Immediately after inception, with no change in market rates, the value of a par interest rate swap to either party is closest to which amount?

  1. The full notional amount
  2. Zero Correct answer.
  3. The accrued floating coupon
  4. The present value of the fixed leg

Explanation

A par swap is struck so that the present values of both legs are equal at inception, giving zero net value. Value arises only as rates and time-to-maturity change afterward.

Question 42Interest Rate Risk and Hedging Instruments

A portfolio manager holds a receiver swap and expects the yield curve to steepen significantly with long rates rising while short rates stay anchored. What is the primary risk to the position?

  1. The swap gains because short rates are anchored
  2. The swap loses as the fixed leg's discounting and rate rise Correct answer.
  3. The swap gains because long rates rise
  4. The swap is unaffected by curve shape

Explanation

A receiver swap gains when rates fall and loses when rates rise, and the long-dated fixed leg is most sensitive to long rates. A bear steepening therefore erodes the receiver's value.

Question 43Interest Rate Risk and Hedging Instruments

Which instrument is a bilateral agreement to exchange a fixed rate for a floating rate over a set term with no upfront premium?

  1. Interest rate floor
  2. Interest rate swap Correct answer.
  3. Bond option
  4. Interest rate cap

Explanation

A plain-vanilla swap exchanges fixed and floating payments with no premium because both legs are valued equally at inception. Caps and floors are options that require premium.

Question 44Interest Rate Risk and Hedging Instruments

A bank has assets that reprice monthly and liabilities that reprice annually. To reduce repricing mismatch it should enter which position?

  1. Buy a receiver swaption
  2. Receive fixed in a swap Correct answer.
  3. Pay fixed in a swap
  4. Sell a floor

Explanation

Assets repricing faster than liabilities means the bank benefits when rates fall and is hurt when rates rise relative to funding. Receiving fixed converts floating asset income into a fixed stream, aligning with slower-repricing liabilities.

Question 45Interest Rate Risk and Hedging Instruments

What does the swap spread represent?

  1. The credit spread of the floating index
  2. The difference between the par swap rate and the yield on a government bond of comparable maturity Correct answer.
  3. The difference between the bid and ask on a swap
  4. The difference between fixed and floating payments in one period

Explanation

The swap spread is the par swap rate minus the yield on a Treasury of similar maturity, reflecting bank credit and liquidity factors. It is not a bid-ask or a single-period cash difference.

Question 46Interest Rate Risk and Hedging Instruments

A treasurer wants protection against rising rates but is unwilling to pay premium and is comfortable giving up benefit below a floor rate. Which strategy is most suitable?

  1. Buy a payer swaption
  2. Buy a cap outright
  3. Enter a zero-cost collar Correct answer.
  4. Buy a floor outright

Explanation

A zero-cost collar funds a bought cap by selling a floor, providing upside protection while capping the benefit if rates fall. It requires no net premium when strikes are set to offset.

Question 47Interest Rate Risk and Hedging Instruments

Which factor most increases the value of an interest rate cap, all else equal?

  1. A lower strike rate Correct answer.
  2. A higher strike rate
  3. A shorter time to expiry
  4. Lower interest rate volatility

Explanation

A cap pays the excess of the index over the strike, so a lower strike increases the likelihood and size of payoff. Higher volatility and longer expiry also raise value, while a higher strike reduces it.

Question 48Interest Rate Risk and Hedging Instruments

In a cross-currency interest rate swap, which additional risk is present beyond that of a single-currency swap?

  1. Credit risk that is eliminated by netting
  2. Exchange rate risk on notional and interest payments Correct answer.
  3. Basis risk from the floating indices only
  4. Inflation risk on the fixed leg

Explanation

Cross-currency swaps involve periodic interest and often principal exchanges in different currencies, so FX movements affect the value of those cash flows. Single-currency swaps have no FX exposure.

Question 49Interest Rate Risk and Hedging Instruments

A firm enters a forward rate agreement to lock a three-month rate starting in six months at 4.00% on a 10 million notional. At settlement the reference rate is 4.50%. Ignoring discounting and day-count, what is the approximate payoff to the firm?

  1. It receives 12,500 Correct answer.
  2. It pays 12,500
  3. It receives 50,000
  4. It pays 50,000

Explanation

The firm locked 4.00% and the rate settled higher at 4.50%, so the long FRA receives the 0.50% differential on notional: 0.005 x 10,000,000 = 50,000 before day-count. The payoff is received because the firm hedged against rising rates.

Question 50Interest Rate Risk and Hedging Instruments

Which statement about the relationship between swaptions and the underlying swap is correct?

  1. A payer swaption gives the right to enter a swap paying fixed Correct answer.
  2. A payer swaption obligates the holder to pay fixed
  3. A receiver swaption gives the right to pay fixed
  4. A swaption premium is paid only if exercised

Explanation

A payer swaption confers the right, not the obligation, to enter a swap as the fixed-rate payer. The holder exercises only when favorable, and premium is paid upfront regardless of exercise.