Derivatives & Risk Management

CFA® Level III, published weight 10–15%. Options strategies, swaps/forwards/futures strategies, currency management.

What the outline covers

Options Strategies
Swaps, Forwards, and Futures Strategies
Currency Management: An Introduction

Sample questions

These 5 questions are free in the app too. Try each one before opening the answer.

Question 1

An investor buys stock at $48 and writes a call with a $52 strike for a $2 premium. The maximum gain on the covered call is:

S₀ = $48 · X = $52 · premium $2

A. $2
B. $4
C. $6
D. Unlimited

Show the answer

C. Maximum gain = (X − S₀) + premium = (52 − 48) + 2 = $6, achieved at or above the strike. Upside beyond $52 is surrendered.

Reading: Derivatives and Risk Management — Options Strategies

Question 2

A zero-cost collar on a long equity position produces:

A. Unlimited upside with limited downside
B. Bounded upside and bounded downside
C. Unlimited downside with limited upside
D. The same payoff as the underlying

Show the answer

B. The long put floors the loss and the short call caps the gain. The premium received funds the premium paid, hence zero cost.

Reading: Derivatives and Risk Management — Options Strategies

Question 3

A manager holds a $50m portfolio with a beta of 1.1 and wants a beta of 0.7. Futures with a beta of 0.95 have a contract value of $250,000. The required position is closest to:

V_P $50m · β_P 1.1 · β_T 0.7 · β_f 0.95 · P_f $250,000

A. Buy 84 contracts
B. Sell 84 contracts
C. Sell 21 contracts
D. Buy 21 contracts

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B. N = [(0.7 − 1.1)/0.95] × (50,000,000/250,000) = −0.4211 × 200 = −84.2. The negative sign means selling roughly 84 contracts.

Reading: Derivatives and Risk Management — Swaps, Forwards and Futures Strategies

Question 4

Which condition most strongly argues for leaving foreign currency exposure unhedged?

A. A short investment horizon
B. High correlation between the currency and the asset return
C. A long horizon and low correlation between currency and asset returns
D. High hedging cost combined with a short horizon

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C. Over long horizons currency effects tend to mean-revert, and low correlation means the currency contributes diversification rather than risk.

Reading: Derivatives and Risk Management — Currency Management

Question 5

A domestic investor earns 8% on a foreign asset while the foreign currency appreciates 3%. The domestic-currency return is closest to:

R_FC = 8% · R_FX = 3%

A. 5.00%
B. 11.00%
C. 11.24%
D. 24.00%

Show the answer

C. (1.08)(1.03) − 1 = 1.1124 − 1 = 11.24%. Adding the two returns gives 11.00% and omits the cross-product term.

Reading: Derivatives and Risk Management — Currency Management

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