Derivatives and Alternative Investments Practice Quiz
1. A forward contract is an agreement to:
A. Buy or sell an asset at a future date for a price agreed upon today.
B. Exchange one asset for another at the current market price.
C. Protect against price movements using insurance.
D. Enter a standardized contract traded on an exchange.
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2. Which of the following is true about futures contracts?
A. They are over-the-counter contracts.
B. They are marked to market daily.
C. They involve payment at the end of the contract.
D. They have no margin requirements.
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3. What is the main purpose of a swap agreement?
A. To hedge risk or speculate on interest rate or currency movements.
B. To acquire ownership of a physical asset.
C. To exchange one physical good for another.
D. To lock in a fixed rate for a loan repayment.
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4. Which of the following is considered an alternative investment?
A. Stocks
B. Bonds
C. Private equity
D. Mutual funds
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5. The intrinsic value of a call option is calculated as:
A. Strike price minus the stock price.
B. Stock price minus the strike price.
C. The premium paid for the option.
D. The difference between strike price and the risk-free rate.
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6. What is the maximum loss for a buyer of a call option?
A. The strike price.
B. The premium paid.
C. The difference between the strike price and the asset price.
D. Unlimited loss.
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7. In which of the following markets are derivatives most commonly traded?
A. Commodities markets
B. Stock markets
C. Bond markets
D. Over-the-counter markets
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8. Which of the following is NOT a characteristic of hedge funds?
A. High liquidity
B. Limited investor access
C. High minimum investment requirements
D. Active management
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9. The payoff from a short put option occurs when:
A. The underlying asset price increases.
B. The underlying asset price decreases.
C. The option is exercised and expires in the money.
D. The option expires out of the money.
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10. A portfolio is hedged with derivatives to:
A. Maximize profits.
B. Eliminate all risks.
C. Protect against adverse price movements.
D. Speculate on market movements.
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11. Which of the following is a key risk of investing in alternative investments?
A. High liquidity
B. High transparency
C. Limited regulation
D. Low management fees
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12. The notional value of a derivative contract refers to:
A. The market price of the underlying asset.
B. The total value of the derivative.
C. The nominal or face value used to calculate payments.
D. The premium paid to enter the contract.
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13. What is the primary difference between forward and futures contracts?
A. Futures are standardized, while forwards are customized.
B. Forwards are traded on exchanges, while futures are over-the-counter.
C. Futures involve no margin, while forwards do.
D. Forwards are marked to market daily, while futures are not.
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14. Which of the following best describes a hedge fund’s lock-up period?
A. The time required for the fund to be audited.
B. A period during which investors cannot withdraw funds.
C. The time needed to start trading derivatives.
D. The duration of a futures contract.
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15. What does a long position in a futures contract mean?
A. The investor expects prices to fall.
B. The investor expects prices to rise.
C. The investor is selling the futures contract.
D. The investor is closing the position.
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16. Which of the following best describes private equity investments?
A. Investments in publicly traded companies.
B. Investments in early-stage or private companies.
C. Short-term investments in derivatives.
D. Fixed-income investments in government securities.
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17. What is a credit default swap (CDS)?
A. A type of bond issued by companies.
B. A contract that insures against credit risk.
C. A forward contract for credit repayments.
D. A swap that exchanges variable interest rates.
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18. Which of the following is a common use of derivatives?
A. To increase liquidity in financial markets.
B. To hedge risk or speculate on price movements.
C. To issue corporate bonds.
D. To directly purchase physical commodities.
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19. Which of the following represents a real estate investment?
A. Hedge funds
B. REITs (Real Estate Investment Trusts)
C. Commodities
D. Derivatives
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20. A put option provides the buyer with:
A. The obligation to sell an asset.
B. The right to buy an asset.
C. The right to sell an asset.
D. The obligation to buy an asset.
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21. What is the purpose of collateral in derivatives trading?
A. To prevent losses entirely.
B. To act as a performance guarantee.
C. To earn interest during the contract term.
D. To eliminate counterparty risk.
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22. Alternative investments are generally characterized by:
A. High liquidity and regulation.
B. Low volatility and returns.
C. High fees and limited access.
D. Low risk and guaranteed returns.
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23. The primary purpose of a hedge fund strategy is to:
A. Passively track the stock market.
B. Minimize taxes for investors.
C. Generate high returns with active management.
D. Ensure capital preservation at all costs.
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24. What happens if a call option expires out of the money?
A. The buyer makes a profit.
B. The option has no value.
C. The seller incurs a loss.
D. The premium is refunded.
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25. Which of the following is an example of a derivative?
A. Exchange-Traded Fund (ETF)
B. Real Estate Investment Trust (REIT)
C. Call option
D. Corporate bond
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26. Leverage in alternative investments:
A. Reduces risk exposure.
B. Increases the potential for higher returns and losses.
C. Eliminates the need for collateral.
D. Guarantees positive returns.
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27. Which of the following is NOT a type of swap?
A. Interest rate swap
B. Commodity swap
C. Inflation swap
D. Stock price swap
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28. A derivative contract derives its value from:
A. The interest rate of the central bank.
B. The underlying asset.
C. The margin requirements.
D. The credit risk of the seller.
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29. A primary goal of alternative investments is:
A. To ensure market stability.
B. To provide diversification and risk-adjusted returns.
C. To invest only in equities.
D. To offer low fees and maximum liquidity.
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30. Which of the following statements about derivatives is true?
A. They always reduce risk.
B. They are only traded on exchanges.
C. They are financial instruments used for hedging or speculation.
D. They require no initial investment.
1. The main advantage of using derivatives in portfolio management is:
A. Eliminating all market risks.
B. Achieving higher returns with no risks.
C. Managing and hedging financial risks effectively.
D. Reducing transaction costs to zero.
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2. Which of the following is an example of a commodity derivative?
A. A forward contract on oil.
B. A mutual fund investing in gold mining companies.
C. A government bond issued for commodity storage.
D. An exchange-traded fund (ETF) that tracks the S&P 500.
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3. An investor who sells a futures contract is:
A. Taking a short position.
B. Taking a long position.
C. Hedging against interest rate risk.
D. Speculating on a rise in the market price.
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4. Which of the following best describes a leveraged buyout (LBO)?
A. Buying an asset using only equity financing.
B. Acquiring a company using a significant amount of borrowed money.
C. Purchasing a derivative with high leverage.
D. Investing in a public stock with no margin requirements.
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5. A plain vanilla interest rate swap involves:
A. Exchanging fixed interest payments for floating interest payments.
B. Exchanging fixed interest rates for equity returns.
C. Swapping currencies between two parties.
D. Exchanging variable returns for zero-coupon bonds.
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6. Which of the following best defines a credit risk in derivatives trading?
A. The risk of a change in interest rates.
B. The risk that the counterparty may default on their obligation.
C. The risk of price volatility in the underlying asset.
D. The risk of changes in regulatory policies.
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7. Hedge funds typically charge:
A. Flat fees with no performance incentives.
B. A performance-based fee structure, such as “2 and 20.”
C. No management or performance fees.
D. The same fees as mutual funds.
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8. A key difference between options and futures is:
A. Futures provide the right but not the obligation to buy or sell.
B. Options involve a daily mark-to-market process.
C. Futures contracts require mandatory delivery of the underlying asset.
D. Options require the buyer to pay a premium upfront.
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9. Which of the following strategies is most commonly used in hedge funds?
A. Passive indexing
B. Long/short equity
C. Market-neutral portfolio allocation
D. Fixed-income investments only
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10. Alternative investments are generally suitable for:
A. Short-term investors looking for liquidity.
B. Investors with low risk tolerance.
C. Sophisticated investors seeking diversification and higher returns.
D. Risk-averse individuals who avoid volatility.
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11. In a call option, the breakeven price is calculated as:
A. Strike price minus the premium paid.
B. Strike price plus the premium paid.
C. Stock price minus the premium received.
D. Stock price plus the strike price.
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12. An investor who buys a put option expects the price of the underlying asset to:
A. Increase.
B. Decrease.
C. Remain constant.
D. Become more volatile.
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13. Which of the following best describes alternative investments like venture capital?
A. High-risk, long-term investments in startups or private companies.
B. Short-term investments in publicly traded companies.
C. Fixed-income securities backed by governments.
D. Fully liquid investments with minimal risk.
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14. In derivatives trading, margin refers to:
A. The maximum profit earned on a trade.
B. A deposit made to secure performance on a contract.
C. The difference between bid and ask prices.
D. A premium paid for insurance.
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15. Which of the following is NOT a characteristic of alternative investments?
A. Low liquidity
B. High transparency
C. Limited regulation
D. Unique risk-return profiles
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16. The value of a forward contract at initiation is:
A. Positive for the buyer.
B. Positive for the seller.
C. Zero for both parties.
D. Determined by the spot price.
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17. Which of the following is true about an exchange-traded fund (ETF)?
A. It is a derivative instrument.
B. It is a type of alternative investment.
C. It trades like a stock on an exchange.
D. It involves high liquidity constraints.
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18. Which of the following is a type of exotic option?
A. American option
B. European option
C. Barrier option
D. Call option
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19. What is the role of a central counterparty in derivatives trading?
A. It provides leverage to all traders.
B. It guarantees the performance of all contracts.
C. It eliminates the need for clearing margins.
D. It sets the strike prices for all options.
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20. An investor who writes a covered call:
A. Hedges their long position in the underlying asset.
B. Buys a put option on the same underlying asset.
C. Speculates on the asset price falling.
D. Sells a futures contract on the underlying asset.
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21. Which of the following best defines a real asset?
A. A stock traded on an exchange.
B. A physical asset such as real estate or commodities.
C. A bond issued by the government.
D. A synthetic financial instrument.
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22. What is the main benefit of diversifying a portfolio with alternative investments?
A. Higher returns with lower risk.
B. Reduced transaction costs.
C. Reduced correlation with traditional investments.
D. Improved liquidity.
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23. What is the payoff of a long futures contract at maturity?
A. The spot price minus the futures price.
B. The futures price minus the strike price.
C. The difference between the strike price and the premium.
D. The futures price minus the spot price.
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24. Private equity firms typically invest in:
A. Government bonds.
B. Publicly traded stocks.
C. Startups and underperforming private companies.
D. Commodities like oil and gold.
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25. Which of the following is the most commonly used underlying asset for derivatives?
A. Real estate
B. Equities, bonds, and commodities
C. Rare collectibles
D. Hedge funds
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26. Which of the following describes the “speculative motive” for using derivatives?
A. To increase exposure to potential price movements.
B. To lock in a fixed price for an asset.
C. To reduce risks associated with an investment.
D. To diversify a portfolio.
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27. The primary goal of a real estate investment trust (REIT) is:
A. To trade derivatives on real estate.
B. To provide exposure to real estate without direct ownership.
C. To fund only commercial construction projects.
D. To invest in hedge funds focused on real estate.
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28. The settlement price of a futures contract is determined:
A. Based on the average price of the underlying asset.
B. At the end of each trading day.
C. At the beginning of the contract period.
D. By the counterparty.
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29. The key characteristic of a structured product is:
A. Its reliance on alternative assets.
B. Its predefined payoff based on an underlying asset.
C. Its role in increasing trading liquidity.
D. Its ability to eliminate counterparty risk.
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30. The main benefit of hedge funds over mutual funds is:
A. Higher liquidity.
B. Broader access to small investors.
C. Flexibility in using derivatives and alternative strategies.
D. Greater transparency and regulation.
1. What does the notional value of a derivative represent?
A. The total premium paid for the contract.
B. The theoretical value used to calculate cash flows.
C. The market value of the derivative at any given time.
D. The intrinsic value of the contract at expiration.
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2. A straddle strategy in options trading involves:
A. Buying a call option and selling a put option simultaneously.
B. Buying both a call option and a put option on the same underlying asset with the same strike price and expiration date.
C. Writing multiple call options with different strike prices.
D. Holding multiple futures contracts to hedge risk.
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3. Which type of alternative investment is characterized by the pooling of investors’ money to fund a portfolio of private companies?
A. Hedge funds
B. Private equity
C. Real estate investment trusts (REITs)
D. Venture capital
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4. A forward rate agreement (FRA) is used to:
A. Lock in an interest rate for borrowing or lending in the future.
B. Exchange one currency for another at a future date.
C. Hedge against equity price movements.
D. Speculate on commodity prices.
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5. Which of the following is a key characteristic of an American option?
A. It can only be exercised at maturity.
B. It cannot be traded before the expiration date.
C. It can be exercised at any time up to the expiration date.
D. Its price is fixed at initiation and cannot change.
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6. What is a total return swap?
A. A derivative used to exchange the return of an asset for a fixed payment.
B. A swap used to hedge currency risk.
C. A financial instrument for predicting future interest rates.
D. A credit derivative used in mortgage-backed securities.
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7. What is the main risk faced by investors in leveraged alternative investments?
A. Increased market efficiency
B. Higher transaction fees
C. Amplified losses due to leverage
D. Reduced access to capital markets
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8. The primary role of a clearinghouse in a derivatives market is to:
A. Match buyers and sellers directly.
B. Guarantee the performance of contracts and reduce counterparty risk.
C. Speculate on behalf of traders.
D. Establish the spot price of the underlying asset.
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9. In a zero-coupon swap, what distinguishes it from a standard interest rate swap?
A. Payments are made only at maturity.
B. It involves only fixed-rate payments.
C. Payments are made continuously over time.
D. It is based on the movement of equity indices.
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10. The primary purpose of commodity futures is to:
A. Eliminate market speculation.
B. Allow producers and consumers to hedge against price volatility.
C. Provide liquidity for derivative traders.
D. Establish a direct link between producers and consumers.
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11. An exotic option is distinguished from standard options because it:
A. Is traded only on regulated exchanges.
B. Has customized features and payoffs.
C. Does not involve any underlying asset.
D. Always involves currency trading.
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12. Which of the following derivatives is used primarily to protect against changes in currency exchange rates?
A. Credit default swaps
B. Currency swaps
C. Commodity futures
D. Equity options
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13. Hedge funds are primarily:
A. Highly regulated investment vehicles.
B. Low-risk investments designed for all investors.
C. Flexible in their investment strategies, including using leverage and derivatives.
D. Focused exclusively on equity markets.
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14. What does a high-water mark in hedge fund performance mean?
A. The maximum amount of leverage the fund is allowed to use.
B. The highest value a portfolio must exceed before performance fees can be charged again.
C. The peak number of investors in the fund.
D. The largest allocation to alternative investments allowed in a portfolio.
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15. Which of the following describes a mezzanine financing strategy?
A. A low-risk equity investment in early-stage companies.
B. A hybrid financing method combining debt and equity.
C. A strategy used exclusively by hedge funds.
D. An investment focusing only on commodities.
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16. In derivatives trading, basis risk arises from:
A. The difference between the spot price and the futures price.
B. The inability to exercise an American option early.
C. Fluctuations in interest rates.
D. Credit default by the counterparty.
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17. A volatility smile in options pricing is observed when:
A. The implied volatility is the same for all strike prices.
B. The implied volatility is lower for out-of-the-money options.
C. The implied volatility is higher for both deep in-the-money and out-of-the-money options.
D. The volatility of the underlying asset is consistent over time.
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18. Which of the following is NOT a characteristic of private equity investments?
A. High liquidity
B. Long-term horizon
C. Active management of portfolio companies
D. Limited access for retail investors
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19. The Black-Scholes model is used to:
A. Determine the spot price of a commodity.
B. Price options by estimating their fair value.
C. Measure credit risk in swaps.
D. Evaluate portfolio performance.
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20. The Sharpe ratio is commonly used to evaluate:
A. The correlation between two investments.
B. Risk-adjusted returns of an investment.
C. The beta of a portfolio.
D. The creditworthiness of a counterparty.
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21. A protective put strategy involves:
A. Writing a put option to hedge against losses.
B. Buying a put option to limit downside risk.
C. Selling a call option to generate premium income.
D. Combining call and put options on different underlying assets.
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22. A convertible bond is best described as:
A. A bond that pays interest in a foreign currency.
B. A bond that can be converted into equity at the discretion of the holder.
C. A bond issued by a private equity fund.
D. A bond that pays variable interest rates.
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23. Which of the following is a measure of downside risk in alternative investments?
A. Beta
B. Value at risk (VaR)
C. Alpha
D. R-squared
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24. The term “alpha” in hedge fund performance refers to:
A. The amount of leverage used by the fund.
B. Excess returns generated above a benchmark.
C. The degree of diversification in the portfolio.
D. The correlation between fund returns and market returns.
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25. Which of the following statements is true about credit default swaps (CDS)?
A. They are used to hedge equity price risk.
B. They provide insurance against the default of a borrower.
C. They involve the exchange of physical commodities.
D. They are only traded on regulated exchanges.
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26. The payoff of a European put option at expiration is:
A. The greater of zero or the strike price minus the stock price.
B. The stock price minus the strike price.
C. Always equal to the premium paid.
D. The same as an American put option.
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27. What does “hedging effectiveness” measure?
A. The profitability of a speculative position.
B. The reduction in risk achieved through hedging.
C. The cost of entering into a derivative contract.
D. The correlation between interest rate changes and asset returns.
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28. Which of the following describes a swaption?
A. An option to enter into a swap agreement.
B. A swap agreement based on equity returns.
C. A derivative used only in currency trading.
D. An agreement to exchange commodities at a future date.
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29. What is the key benefit of investing in infrastructure as an alternative asset?
A. High liquidity
B. Stable cash flows over a long term
C. Minimal exposure to market risks
D. Rapid capital appreciation
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30. Collateralized debt obligations (CDOs) are primarily backed by:
A. Equity securities.
B. A pool of debt instruments, such as loans or mortgages.
C. Derivative contracts like futures and options.
D. Commodities like oil and gas.
1. Which of the following factors directly affects the value of a call option?
A. Lower time to maturity
B. Higher strike price
C. Higher volatility of the underlying asset
D. Decrease in the price of the underlying asset
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2. A swap where one party pays a fixed interest rate and the other pays a floating rate is called:
A. Currency swap
B. Interest rate swap
C. Credit default swap
D. Total return swap
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3. In the context of futures contracts, initial margin refers to:
A. The premium paid to enter the contract.
B. The collateral posted by both parties to the contract.
C. The profit margin expected by the investor.
D. The fee charged by the clearinghouse for maintaining the position.
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4. A hedge fund strategy that focuses on exploiting mispricing between related securities is called:
A. Global macro
B. Arbitrage
C. Long-short equity
D. Managed futures
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5. What is the primary purpose of a derivative contract?
A. Generate regular income through dividends.
B. Protect against or profit from changes in the price of an underlying asset.
C. Reduce investment fees and transaction costs.
D. Ensure access to private equity investments.
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6. An investor purchases a futures contract on oil. If the price of oil decreases significantly, the investor will:
A. Experience a loss.
B. Realize a profit.
C. Have no impact as it’s not an option.
D. Pay the margin call.
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7. Which type of derivative is most commonly used to hedge foreign exchange risk?
A. Commodity futures
B. Forward contracts
C. Equity options
D. Interest rate swaps
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8. What is a “barrier option”?
A. An option that only becomes active or expires when the price of the underlying asset reaches a specific level.
B. A standard option that has a fixed expiration date.
C. An option used exclusively for hedging commodities.
D. A type of swap agreement.
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9. In private equity, a leveraged buyout (LBO) refers to:
A. Using borrowed funds to acquire a company.
B. Raising equity capital through an IPO.
C. Acquiring distressed assets for a turnaround.
D. Investing in early-stage startups.
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10. What is the primary purpose of a stop-loss order?
A. To lock in profits when a security’s price reaches a certain level.
B. To prevent excessive losses by selling at a predetermined price.
C. To ensure a higher return on derivatives contracts.
D. To increase leverage in a portfolio.
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11. A variance swap allows investors to:
A. Exchange fixed interest payments for floating ones.
B. Trade the realized variance of an asset’s price movements.
C. Hedge against currency fluctuations.
D. Speculate on commodity prices.
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12. Convertible bonds offer investors:
A. Fixed periodic interest payments with no equity benefits.
B. The ability to convert the bond into equity at a predetermined price.
C. Protection from currency exchange risks.
D. Direct exposure to commodities.
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13. What is the primary feature of a Real Estate Investment Trust (REIT)?
A. High liquidity compared to physical real estate investments.
B. Exemption from taxes on rental income.
C. Low correlation with stock market indices.
D. High exposure to commodity price risk.
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14. In an options contract, “moneyness” refers to:
A. The current profitability of the option.
B. The time remaining until expiration.
C. The difference between the strike price and the underlying asset’s price.
D. The volatility of the underlying asset.
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15. Which hedge fund strategy is most likely to use leverage aggressively?
A. Long-short equity
B. Arbitrage
C. Distressed debt
D. Global macro
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16. What distinguishes an exchange-traded derivative from an over-the-counter derivative?
A. Standardized contracts and centralized clearing.
B. Flexible terms and low counterparty risk.
C. High customization and regulatory oversight.
D. Lower liquidity and higher transaction costs.
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17. Which of the following risks is specific to alternative investments?
A. Systematic risk
B. Illiquidity risk
C. Interest rate risk
D. Inflation risk
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18. A portfolio manager uses a covered call strategy. This involves:
A. Selling call options while holding the underlying asset.
B. Buying call options and selling the underlying asset.
C. Selling both call and put options simultaneously.
D. Writing options without owning the underlying asset.
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19. Which of the following is a primary benefit of alternative investments?
A. High liquidity and ease of trading.
B. Lower correlation with traditional asset classes.
C. Guaranteed returns regardless of market conditions.
D. Fixed and predictable income streams.
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20. A collar strategy in derivatives involves:
A. Buying a put option and selling a call option with the same expiration date.
B. Purchasing both a call and a put option on the same underlying asset.
C. Limiting risk by combining a long stock position with a protective put and a covered call.
D. Selling options on multiple underlying assets.
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21. Which of the following is NOT a characteristic of hedge funds?
A. Flexible investment strategies
B. High level of regulation
C. Use of leverage and derivatives
D. Limited access to retail investors
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22. The payoff of a long forward contract is:
A. Zero at expiration.
B. Positive if the underlying asset price increases above the forward price.
C. Negative if the forward price exceeds the underlying asset price.
D. Determined only by the interest rate changes.
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23. Which term describes the simultaneous purchase and sale of the same or similar security to exploit price differences?
A. Arbitrage
B. Speculation
C. Hedging
D. Diversification
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24. Which type of alternative investment is focused on assets like infrastructure, farmland, and timberland?
A. Real estate
B. Natural resources
C. Private equity
D. Managed futures
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25. The time value of an option refers to:
A. The intrinsic value of the option.
B. The potential for further price movement before expiration.
C. The difference between the strike price and the spot price.
D. The premium paid to enter the option contract.
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26. The Greeks in options trading, such as delta and gamma, are used to measure:
A. The intrinsic value of the option.
B. The sensitivity of the option’s price to changes in market variables.
C. The correlation between the option and the underlying asset.
D. The level of margin required for trading.
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27. Which of the following alternative investments is most directly associated with commodities?
A. Hedge funds
B. Real estate
C. Managed futures
D. Private equity
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28. A knock-in option is:
A. Activated only when the underlying asset price reaches a certain level.
B. A standard American option.
C. Automatically exercised at expiration.
D. Only used for foreign exchange hedging.
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29. A “fund of funds” investment structure involves:
A. A single hedge fund investing in various asset classes.
B. A mutual fund investing in multiple hedge funds.
C. A private equity fund investing in public securities.
D. A diversified portfolio of REITs.
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30. What is the primary driver of returns in venture capital investments?
A. Dividend payouts
B. High growth potential of startup companies
C. Reduced risk through diversification
D. Tax benefits associated with long-term investments
1. The intrinsic value of a call option is calculated as:
A. The strike price minus the current price of the underlying asset.
B. The current price of the underlying asset minus the strike price.
C. The premium paid for the option minus its time value.
D. The total value of the option at expiration.
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2. Which of the following is a defining feature of futures contracts?
A. They are traded over-the-counter.
B. They require physical delivery of the underlying asset.
C. They are standardized and traded on exchanges.
D. They do not require margin.
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3. A hedge fund using a “distressed debt” strategy is likely to invest in:
A. Bonds issued by financially stable companies.
B. Securities of companies near bankruptcy or restructuring.
C. Startups with high growth potential.
D. Exchange-traded derivatives.
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4. In a protective put strategy, an investor:
A. Sells a put option to generate income.
B. Buys a call option to offset losses.
C. Buys a put option to hedge downside risk on an asset they own.
D. Sells both a call and a put option simultaneously.
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5. Which of the following is most likely to increase the value of a put option?
A. An increase in the price of the underlying asset.
B. An increase in the volatility of the underlying asset.
C. A decrease in the time to expiration.
D. A decrease in interest rates.
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6. What is the primary objective of a commodity futures contract?
A. To hedge against price fluctuations.
B. To generate dividend income.
C. To own the physical commodity.
D. To secure long-term financing.
________________________________________
7. A long straddle involves:
A. Buying a call option and selling a put option on the same asset.
B. Selling both a call and a put option on different assets.
C. Buying both a call and a put option with the same strike price and expiration date.
D. Writing options without owning the underlying asset.
________________________________________
8. The NAV (Net Asset Value) of a hedge fund is calculated as:
A. Total fund assets minus total fund liabilities.
B. Total fund assets divided by the number of outstanding shares.
C. The current market value of the portfolio.
D. The management fee charged to investors.
________________________________________
9. What is a key characteristic of credit default swaps (CDS)?
A. They provide protection against currency fluctuations.
B. They insure against the default of a borrower.
C. They allow for the physical delivery of commodities.
D. They are standardized contracts traded on exchanges.
________________________________________
10. An investor holding a short position in a futures contract profits when:
A. The price of the underlying asset increases.
B. The price of the underlying asset decreases.
C. Volatility in the market rises.
D. Interest rates fall.
________________________________________
11. A Real Estate Investment Trust (REIT) must distribute at least what percentage of its taxable income to shareholders annually?
A. 50%
B. 75%
C. 90%
D. 100%
________________________________________
12. In a plain vanilla interest rate swap, one party agrees to:
A. Pay fixed interest payments and receive floating interest payments.
B. Pay floating interest payments and receive fixed interest payments.
C. Exchange principal amounts in different currencies.
D. Hedge against credit risk.
________________________________________
13. Which of the following is true of forward contracts?
A. They are standardized and traded on exchanges.
B. They are settled daily through a clearinghouse.
C. They are customized contracts traded over-the-counter.
D. They are only used for hedging purposes.
________________________________________
14. A major risk associated with private equity investments is:
A. High liquidity.
B. Short holding periods.
C. Illiquidity and long investment horizons.
D. Limited access to leverage.
________________________________________
15. A synthetic forward contract can be created by:
A. Combining a long call option and a long put option.
B. Combining a long call option and a short put option.
C. Combining a short call option and a long put option.
D. Combining a short call option and a short put option.
________________________________________
16. The term “carry trade” refers to:
A. Borrowing in a low-interest-rate currency and investing in a high-interest-rate currency.
B. Hedging interest rate risk through derivatives.
C. Trading commodities and holding the physical asset.
D. Buying options on margin.
________________________________________
17. A zero-sum game in derivatives trading implies:
A. All participants make a profit.
B. One party’s gain equals another party’s loss.
C. There is no risk involved.
D. Both parties share profits equally.
________________________________________
18. A commodity swap is typically used to:
A. Hedge against fluctuations in commodity prices.
B. Speculate on interest rate movements.
C. Reduce foreign exchange risk.
D. Insure against counterparty default.
________________________________________
19. What is the key difference between forward contracts and futures contracts?
A. Forward contracts are settled daily.
B. Futures contracts are standardized and exchange-traded.
C. Forward contracts are traded on exchanges.
D. Futures contracts are highly customizable.
________________________________________
20. A high-water mark provision in hedge funds ensures that:
A. Managers are paid performance fees only on new profits.
B. Investors receive guaranteed returns.
C. Fees are charged regardless of losses.
D. The fund is diversified across multiple asset classes.
________________________________________
21. Which of the following is an advantage of investing in hedge funds?
A. High liquidity and transparency.
B. Access to unique investment strategies.
C. Minimal regulatory requirements.
D. Low investment minimums.
________________________________________
22. What is the “basis” in futures trading?
A. The margin required to trade a contract.
B. The difference between the spot price and the futures price.
C. The time remaining until contract expiration.
D. The intrinsic value of the futures contract.
________________________________________
23. Collateralized debt obligations (CDOs) are primarily used to:
A. Hedge foreign exchange risk.
B. Repackage loans into tranches for investors.
C. Speculate on interest rates.
D. Reduce the risk of equity investments.
________________________________________
24. A butterfly spread in options trading involves:
A. Writing two options and holding one long position.
B. Combining two long and two short positions in options.
C. Buying and selling options with three different strike prices.
D. Hedging against market volatility.
________________________________________
25. What is the main purpose of a managed futures fund?
A. Provide exposure to private equity markets.
B. Invest in physical commodities.
C. Trade futures contracts to achieve returns.
D. Hedge against interest rate risk.
________________________________________
26. The Sharpe ratio of an alternative investment measures:
A. Total return compared to the benchmark index.
B. Return relative to risk-free rate, adjusted for standard deviation.
C. The correlation between asset classes in the portfolio.
D. Risk relative to historical drawdowns.
________________________________________
27. An equity-linked structured product provides:
A. Direct exposure to real estate.
B. Fixed income returns with no risk.
C. Returns linked to the performance of an equity index.
D. Guaranteed principal protection.
________________________________________
28. A clawback provision in private equity ensures that:
A. Investors are reimbursed for underperformance by the fund managers.
B. Managers can increase performance fees.
C. Funds are invested in highly liquid assets.
D. Investors can exit the fund at any time.
________________________________________
29. Which of the following is a disadvantage of investing in alternative assets?
A. High correlation with traditional markets.
B. Lack of transparency and regulatory oversight.
C. Low potential for diversification.
D. Excessive liquidity.
________________________________________
30. A delta-neutral portfolio is designed to:
A. Eliminate exposure to changes in the underlying asset price.
B. Maximize returns through leverage.
C. Hedge against interest rate risk.
D. Reduce time decay in options.
1. The payoff of a short call option at expiration is:
A. The premium received minus the intrinsic value.
B. Zero if the option is out of the money.
C. The intrinsic value of the option minus the premium.
D. The strike price minus the spot price.
________________________________________
2. A forward rate agreement (FRA) is primarily used to:
A. Lock in future currency exchange rates.
B. Hedge against future interest rate changes.
C. Trade equities in foreign markets.
D. Guarantee the return of principal on investments.
________________________________________
3. Which of the following statements is true about variance swaps?
A. They involve trading the level of an underlying asset.
B. They provide exposure to realized volatility.
C. They are settled through physical delivery of the underlying.
D. They are primarily used in commodity markets.
________________________________________
4. The delta of a derivative measures:
A. The sensitivity of the derivative’s price to changes in the underlying asset’s price.
B. The time decay of the option’s value.
C. The impact of volatility changes on the option’s price.
D. The change in interest rate sensitivity.
________________________________________
5. Which of the following is NOT a characteristic of a hedge fund?
A. Limited transparency.
B. High liquidity.
C. Broad range of investment strategies.
D. High minimum investment requirements.
________________________________________
6. A forward contract can be terminated early by:
A. Selling it in a secondary market.
B. Entering an offsetting contract with the same terms.
C. Exercising the option before expiration.
D. Delivering the underlying asset in advance.
________________________________________
7. What is a “knock-in” barrier option?
A. An option that becomes active only if a specified price level is reached.
B. An option that ceases to exist if a price level is breached.
C. A European option with extended expiration terms.
D. A standardized option traded on exchanges.
________________________________________
8. In which situation would a swaption be used?
A. To hedge against currency exchange rate changes.
B. To gain the right to enter into an interest rate swap in the future.
C. To speculate on future commodity price movements.
D. To hedge against credit default risks.
________________________________________
9. A fund of hedge funds is designed to:
A. Invest in a single hedge fund strategy.
B. Provide diversified exposure across multiple hedge funds.
C. Guarantee high returns with low risk.
D. Eliminate fees associated with individual hedge funds.
________________________________________
10. Which of the following is a common feature of private equity investments?
A. Daily liquidity.
B. Public market trading.
C. Active involvement in portfolio companies.
D. Minimal regulatory oversight.
________________________________________
11. A long futures contract obligates the holder to:
A. Sell the underlying asset at the contract price.
B. Buy the underlying asset at the contract price.
C. Take no action until expiration.
D. Deliver the underlying asset to the counterparty.
________________________________________
12. Which factor is NOT part of the Black-Scholes option pricing model?
A. The current price of the underlying asset.
B. The strike price of the option.
C. The time to expiration.
D. The level of trading volume.
________________________________________
13. Convertible arbitrage strategies typically involve:
A. Short selling stocks and buying put options.
B. Buying convertible bonds and hedging with short equity positions.
C. Arbitraging price differences between futures and forwards.
D. Using derivatives to hedge against currency risk.
________________________________________
14. Which of the following is an alternative investment asset class?
A. Treasury bonds.
B. Real estate.
C. Corporate bonds.
D. Blue-chip stocks.
________________________________________
15. The “gamma” of an option measures:
A. The rate of change of delta with respect to the underlying asset’s price.
B. The sensitivity of the option price to changes in interest rates.
C. The time decay of the option.
D. The volatility of the underlying asset.
________________________________________
16. A total return swap typically involves:
A. Exchanging fixed interest payments for floating interest payments.
B. Exchanging the returns of one asset for the returns of another.
C. Hedging against future price movements in a commodity.
D. Locking in future exchange rates.
________________________________________
17. Which of the following is an example of an absolute return strategy?
A. Benchmark-relative equity investment.
B. Investing in a balanced mutual fund.
C. Hedge fund strategies seeking positive returns in all market conditions.
D. Passive index tracking.
________________________________________
18. The risk of a counterparty defaulting on a forward contract is referred to as:
A. Market risk.
B. Liquidity risk.
C. Credit risk.
D. Operational risk.
________________________________________
19. The primary use of interest rate caps is to:
A. Hedge against rising interest rates.
B. Lock in a fixed interest rate.
C. Hedge against declining interest rates.
D. Speculate on market volatility.
________________________________________
20. Alternative investment strategies often include leverage because:
A. Leverage guarantees positive returns.
B. It enhances returns but increases risk.
C. It eliminates liquidity constraints.
D. It is required by regulators.
________________________________________
21. Which of the following is true about call options?
A. The buyer has an obligation to purchase the underlying asset.
B. The seller has the right to sell the underlying asset.
C. The buyer has the right to buy the underlying asset.
D. They cannot be traded before expiration.
________________________________________
22. Hedge funds with a global macro strategy typically:
A. Focus on distressed debt securities.
B. Trade based on macroeconomic trends and events.
C. Invest only in real estate assets.
D. Use passive investment strategies.
________________________________________
23. The implied volatility of an option reflects:
A. The historical price volatility of the underlying asset.
B. The market’s expectations for future volatility of the underlying asset.
C. The realized volatility of the option.
D. The risk-free rate of return.
________________________________________
24. Which of the following is NOT a type of swap?
A. Equity swap.
B. Commodity swap.
C. Volatility swap.
D. Stock option swap.
________________________________________
25. Which investment vehicle offers exposure to alternative investments with daily liquidity?
A. Hedge funds.
B. Mutual funds.
C. Alternative investment ETFs.
D. Private equity funds.
________________________________________
26. Which of the following is a benefit of using derivatives?
A. Elimination of all investment risk.
B. High levels of transparency in trading.
C. Ability to hedge risk or gain leverage.
D. Guaranteed positive returns.
________________________________________
27. In an exchange-traded futures contract, margin requirements are determined by:
A. The clearinghouse.
B. The broker.
C. The central bank.
D. The buyer and seller.
________________________________________
28. A long position in a credit default swap benefits when:
A. The issuer of the reference bond defaults.
B. Interest rates rise.
C. The reference bond increases in value.
D. The reference bond pays a higher coupon.
________________________________________
29. A callable bond gives the issuer the right to:
A. Call in the bondholder’s investment at any time.
B. Redeem the bond before maturity.
C. Extend the maturity of the bond.
D. Reduce the coupon rate at will.
________________________________________
30. Private equity fund investors typically face:
A. High levels of liquidity and transparency.
B. Long lock-up periods and illiquidity.
C. Guaranteed dividends.
D. Daily valuation of investments.
1. What does the term “mark-to-market” mean in the context of futures contracts?
A. The process of converting futures into physical delivery.
B. The daily settlement of gains and losses based on the market price.
C. The negotiation of new contract terms at maturity.
D. The computation of margin requirements.
________________________________________
2. Which of the following is a key feature of an American option?
A. It can only be exercised at expiration.
B. It can be exercised at any time before expiration.
C. It has no time value component.
D. It is only traded on European exchanges.
________________________________________
3. A “protective put” strategy involves:
A. Writing a put option to generate income.
B. Buying a put option while holding the underlying asset.
C. Selling both a call and a put option.
D. Buying a call option and selling a put option.
________________________________________
4. In a futures market, the initial margin is:
A. A refundable deposit made to open a position.
B. The total amount required to purchase the contract.
C. Paid only by the buyer of the futures contract.
D. The daily settlement amount for losses.
________________________________________
5. The payoff of a long position in a put option at expiration is:
A. The strike price minus the spot price, minus the premium paid.
B. The premium received plus the spot price.
C. Zero if the option is in the money.
D. The spot price minus the strike price, minus the premium.
________________________________________
6. Which of the following is a characteristic of venture capital investments?
A. High liquidity.
B. Investments in publicly traded companies.
C. High risk and high return potential.
D. Fixed income returns.
________________________________________
7. A “synthetic forward contract” can be created by:
A. Combining a long call and a short put at the same strike price.
B. Combining a long put and a short call at different strike prices.
C. Entering a futures contract and buying the underlying.
D. Using swaps and options simultaneously.
________________________________________
8. What is a “contango” market in futures?
A. A market where futures prices are below spot prices.
B. A market where futures prices are above spot prices.
C. A market with no margin requirements.
D. A market where spot and futures prices are identical.
________________________________________
9. Hedge funds that employ “event-driven” strategies focus on:
A. Global economic trends.
B. Corporate events like mergers, bankruptcies, or spin-offs.
C. Passive investment strategies.
D. Fixed income arbitrage.
________________________________________
10. A swap where two parties exchange fixed and floating interest rate payments is called:
A. An equity swap.
B. A commodity swap.
C. An interest rate swap.
D. A total return swap.
________________________________________
11. What is the purpose of a credit default swap?
A. To speculate on currency exchange rates.
B. To hedge against default risk of a bond.
C. To exchange interest rate cash flows.
D. To leverage equity market exposure.
________________________________________
12. The Sharpe ratio measures:
A. The absolute returns of an investment.
B. Risk-adjusted returns of an investment.
C. The volatility of an investment.
D. The diversification benefits of an investment.
________________________________________
13. A put-call parity relationship ensures that:
A. Arbitrage opportunities exist in the market.
B. The price difference between puts and calls is constant.
C. European call and put options are correctly priced.
D. The spot price is equal to the strike price.
________________________________________
14. A private equity “buyout” strategy typically involves:
A. Investing in startups with high growth potential.
B. Acquiring mature companies and restructuring them.
C. Providing debt financing to distressed companies.
D. Gaining minority stakes in public companies.
________________________________________
15. What is the key difference between forwards and futures?
A. Forwards are standardized, while futures are customizable.
B. Futures are standardized and traded on exchanges, while forwards are over-the-counter agreements.
C. Futures involve no margin requirements, while forwards require collateral.
D. Forwards allow daily mark-to-market settlement, while futures do not.
________________________________________
16. A straddle involves:
A. Buying both a call and a put option with the same strike price and expiration date.
B. Selling a call and a put with different expiration dates.
C. Combining a long call and a short put position.
D. Using swaps and options simultaneously.
________________________________________
17. Which of the following is a common feature of real estate investment trusts (REITs)?
A. Guaranteed capital gains.
B. Investments in foreign currency.
C. Tax advantages and high dividend payouts.
D. Investments only in residential properties.
________________________________________
18. A forward contract to buy gold specifies:
A. Delivery of gold on demand.
B. Physical settlement or cash settlement on expiration.
C. Daily margin adjustments.
D. Quarterly rollover of the contract.
________________________________________
19. The vega of an option measures:
A. The sensitivity of the option price to changes in volatility.
B. The rate of time decay of the option price.
C. The change in the delta of the option.
D. The sensitivity of the option price to interest rates.
________________________________________
20. Which of the following statements is true about alternative investments?
A. They are subject to the same regulations as mutual funds.
B. They offer high liquidity compared to traditional assets.
C. They typically have low correlations with traditional asset classes.
D. They are traded only on public exchanges.
________________________________________
21. A covered call strategy involves:
A. Selling a call option while holding the underlying asset.
B. Buying a call option to hedge downside risk.
C. Writing a call and a put simultaneously.
D. Selling a call option without owning the underlying asset.
________________________________________
22. The main purpose of using leverage in hedge funds is to:
A. Reduce risk in volatile markets.
B. Magnify potential returns.
C. Avoid margin requirements.
D. Increase market efficiency.
________________________________________
23. Which of the following is a characteristic of managed futures funds?
A. Exclusive focus on real estate investments.
B. Use of trend-following strategies in futures markets.
C. Restrictions on investing in derivatives.
D. Guaranteed fixed returns.
________________________________________
24. Which type of swap involves exchanging fixed payments for returns linked to a commodity price?
A. Equity swap.
B. Interest rate swap.
C. Commodity swap.
D. Total return swap.
________________________________________
25. An alternative investment often used for portfolio diversification is:
A. Small-cap stocks.
B. High-yield bonds.
C. Private equity.
D. Blue-chip equities.
________________________________________
26. Which of the following describes a futures spread strategy?
A. Taking opposite positions in two contracts with different expirations.
B. Buying and selling a contract for the same commodity on the same exchange.
C. Simultaneously trading two unrelated futures contracts.
D. Hedging risk using options and futures.
________________________________________
27. What does “implied volatility” indicate in an option pricing model?
A. The historical performance of the underlying asset.
B. Market expectations of future price volatility.
C. The intrinsic value of the option.
D. The risk-free interest rate.
________________________________________
28. Hedge funds that specialize in “distressed securities” invest in:
A. Companies nearing bankruptcy.
B. Startups with high growth potential.
C. Large-cap equity securities.
D. Foreign currency pairs.
________________________________________
29. Which of the following is NOT typically considered an alternative investment?
A. Hedge funds.
B. Real estate.
C. Private equity.
D. Treasury bonds.
________________________________________
30. A collar option strategy involves:
A. Buying a put and selling a call with different strike prices.
B. Selling a put and buying a call with the same strike price.
C. Combining swaps and forwards.
D. Holding a long position in the underlying and a put option.
1. What is the primary purpose of using a derivative contract for hedging?
A. To eliminate all investment risk.
B. To lock in a specific profit margin.
C. To reduce the uncertainty of price fluctuations.
D. To speculate on market movements.
________________________________________
2. Which of the following is a feature of a European option?
A. It can be exercised at any time before expiration.
B. It can only be exercised on the expiration date.
C. It must be physically settled.
D. It has no premium associated with it.
________________________________________
3. The delta of an option represents:
A. The sensitivity of the option price to changes in the underlying asset price.
B. The rate of time decay of the option.
C. The change in the option price due to volatility changes.
D. The sensitivity of the option price to interest rate changes.
________________________________________
4. A long strangle involves:
A. Buying a call and a put with the same strike price and expiration date.
B. Buying a call and a put with different strike prices but the same expiration date.
C. Selling a call and a put with the same expiration date.
D. Writing options with no underlying exposure.
________________________________________
5. In a swap agreement, the “notional principal” is:
A. The actual amount exchanged between the parties.
B. Used to calculate the cash flows exchanged in the swap.
C. Always equal to the market value of the underlying asset.
D. The margin requirement for the swap.
________________________________________
6. Which of the following best describes a forward rate agreement (FRA)?
A. A contract to exchange one currency for another.
B. A futures contract for interest rates.
C. An agreement to lock in an interest rate for a future period.
D. A derivative used only in equity markets.
________________________________________
7. Which of the following alternative investments is considered the least liquid?
A. Real estate.
B. Hedge funds.
C. Private equity.
D. Commodities.
________________________________________
8. What is a “basis risk” in the context of hedging?
A. The risk of losing the entire margin deposit.
B. The risk that the hedge and the underlying asset move differently.
C. The risk of early exercise of an option.
D. The risk of a derivative becoming illiquid.
________________________________________
9. A credit spread option is primarily used to:
A. Hedge interest rate risk.
B. Speculate on currency price movements.
C. Hedge or speculate on changes in credit spreads.
D. Manage commodity price fluctuations.
________________________________________
10. The maximum potential loss for a buyer of a call option is:
A. Unlimited.
B. The premium paid for the option.
C. The difference between the strike price and the underlying price.
D. The intrinsic value of the option.
________________________________________
11. In a “cash-and-carry arbitrage,” the arbitrageur:
A. Buys the underlying asset and sells a futures contract.
B. Buys a futures contract and shorts the underlying asset.
C. Combines options and swaps for arbitrage profits.
D. Trades only in the spot market.
________________________________________
12. A “bear spread” strategy can be created by:
A. Buying a call and selling a call with a lower strike price.
B. Selling a put and buying a put with a higher strike price.
C. Buying a call and selling a call with a higher strike price.
D. Selling a put and buying a put with the same expiration date.
________________________________________
13. Which of the following is a key risk in private equity investing?
A. High correlation with equity markets.
B. Illiquidity and long investment horizons.
C. Lack of regulatory oversight.
D. Daily mark-to-market valuation.
________________________________________
14. The intrinsic value of a call option is calculated as:
A. The premium minus the strike price.
B. The spot price minus the strike price, if positive.
C. The strike price minus the spot price, if positive.
D. The difference between time value and volatility.
________________________________________
15. What does a high Sharpe ratio indicate?
A. High absolute returns.
B. High volatility in the portfolio.
C. Strong risk-adjusted performance.
D. Poor diversification benefits.
________________________________________
16. Which type of hedge fund strategy involves exploiting temporary price differences across markets?
A. Event-driven.
B. Arbitrage.
C. Global macro.
D. Distressed securities.
________________________________________
17. A “total return swap” typically involves:
A. Exchanging fixed payments for equity returns.
B. Swapping commodity prices with currency rates.
C. Exchanging returns from one bond with those of another.
D. Hedging only interest rate risk.
________________________________________
18. Which of the following describes a “collar” strategy?
A. Buying a call and selling a put with the same expiration date.
B. Selling a call and buying a put to protect downside risk.
C. Writing options on multiple strike prices.
D. Combining two options with the same strike price.
________________________________________
19. Which derivative instrument is most commonly used to hedge foreign exchange risk?
A. Forward contracts.
B. Commodity futures.
C. Interest rate swaps.
D. Credit default swaps.
________________________________________
20. The primary motivation for investing in hedge funds is:
A. Liquidity.
B. Diversification and absolute returns.
C. Fixed income returns.
D. Tax advantages.
________________________________________
21. What is a “delta-neutral” strategy?
A. A strategy that involves no risk.
B. A portfolio that generates no profits.
C. A hedging strategy where the portfolio’s delta is zero.
D. A strategy that only involves buying call options.
________________________________________
22. A swaption is:
A. An option to enter into a swap agreement.
B. A type of exotic option.
C. A commodity derivative.
D. A structured product.
________________________________________
23. The “Greeks” in option pricing are used to measure:
A. The profit potential of an option.
B. The sensitivity of an option’s price to various factors.
C. The liquidity of the underlying asset.
D. The historical volatility of an option.
________________________________________
24. A leveraged buyout (LBO) typically involves:
A. Using debt to finance the acquisition of a company.
B. Acquiring distressed assets for restructuring.
C. Investing in early-stage companies.
D. Selling off assets to pay down debt.
________________________________________
25. A “long calendar spread” is created by:
A. Buying a long-term option and selling a short-term option on the same underlying.
B. Selling a long-term option and buying a short-term option.
C. Holding options with different strike prices.
D. Combining futures and options.
________________________________________
26. Real estate investments are classified as alternative investments because:
A. They are liquid.
B. They have a low correlation with traditional asset classes.
C. They involve only passive income.
D. They are always traded on public exchanges.
________________________________________
27. Which of the following is true about futures margin accounts?
A. They earn interest at the risk-free rate.
B. They are only used for initial deposits.
C. They are marked to market daily.
D. They eliminate the need for collateral.
________________________________________
28. Which hedge fund strategy focuses on broad economic trends?
A. Global macro.
B. Relative value arbitrage.
C. Event-driven.
D. Equity long/short.
________________________________________
29. Which of the following is true of convertible bonds?
A. They cannot be converted into equity.
B. They provide both fixed income and equity-like exposure.
C. They are the same as callable bonds.
D. They offer tax benefits over regular bonds.
________________________________________
30. Which of the following best describes the payoff of a long forward contract?
A. The spot price at expiration.
B. The forward price minus the spot price.
C. The spot price minus the forward price.
D. The intrinsic value of the forward.
1. Which of the following is a characteristic of forward contracts?
A. They are standardized and traded on exchanges.
B. They are customizable and traded over the counter.
C. They are marked to market daily.
D. They require no collateral.
________________________________________
2. In the context of options, gamma measures:
A. The sensitivity of delta to changes in the underlying asset price.
B. The sensitivity of the option price to time decay.
C. The sensitivity of the option price to volatility changes.
D. The sensitivity of the option price to interest rate changes.
________________________________________
3. What is the purpose of a stop-loss order in trading derivatives?
A. To lock in profits when the market moves favorably.
B. To minimize losses by exiting a position when the price reaches a specific level.
C. To reduce margin requirements.
D. To increase leverage in the portfolio.
________________________________________
4. Which type of swap is used to exchange fixed-rate payments for floating-rate payments?
A. Currency swap.
B. Commodity swap.
C. Interest rate swap.
D. Credit default swap.
________________________________________
5. The primary advantage of using futures contracts over forward contracts is:
A. Customization of terms.
B. Greater liquidity and lower counterparty risk.
C. Elimination of margin requirements.
D. The absence of daily price fluctuations.
________________________________________
6. Which alternative investment focuses on acquiring distressed companies or assets?
A. Venture capital.
B. Private equity.
C. Distressed debt funds.
D. Real estate investment trusts (REITs).
________________________________________
7. What is “implied volatility” in the context of options?
A. The historical volatility of the underlying asset.
B. The expected future volatility derived from the option price.
C. The sensitivity of the option price to interest rates.
D. The realized volatility during the option’s life.
________________________________________
8. A “protective put” strategy involves:
A. Writing a put option to generate income.
B. Buying a put option to limit downside risk while holding the underlying asset.
C. Combining two puts with different strike prices.
D. Selling a put and buying a call simultaneously.
________________________________________
9. In which of the following scenarios would a call option be “in the money”?
A. When the underlying price equals the strike price.
B. When the underlying price is above the strike price.
C. When the underlying price is below the strike price.
D. When the option’s time value is zero.
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10. The main goal of a market-neutral hedge fund is to:
A. Maximize returns regardless of market direction.
B. Mimic market indices.
C. Take leveraged bets on market trends.
D. Minimize risk by maintaining a balanced exposure.
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11. Which of the following describes a “futures spread”?
A. Buying and selling futures contracts on the same underlying asset with different expiration dates.
B. Buying a call and selling a put on the same asset.
C. Hedging by using futures contracts and swaps simultaneously.
D. A strategy involving only spot market trades.
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12. Which derivative is primarily used to transfer credit risk?
A. Interest rate swaps.
B. Credit default swaps (CDS).
C. Commodity futures.
D. Currency forwards.
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13. Which of the following is an example of an “exotic option”?
A. European call.
B. American put.
C. Barrier option.
D. Index option.
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14. What is the purpose of a hedge ratio in risk management?
A. To calculate portfolio returns.
B. To determine the amount of hedging needed to minimize risk.
C. To measure market efficiency.
D. To assess counterparty credit risk.
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15. What type of REIT focuses on owning and operating income-generating properties?
A. Mortgage REITs.
B. Hybrid REITs.
C. Equity REITs.
D. Structured REITs.
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16. A “variance swap” allows an investor to:
A. Exchange fixed interest payments for floating interest payments.
B. Trade the realized volatility of an asset against a fixed volatility.
C. Lock in commodity prices.
D. Speculate on foreign exchange rates.
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17. The time value of an option is greatest:
A. At expiration.
B. When the option is deep in the money.
C. When the option is at the money.
D. When the option is deep out of the money.
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18. Which of the following best describes “alpha” in investment performance?
A. The excess return of an investment relative to the benchmark.
B. The sensitivity of an investment to market movements.
C. The risk-adjusted return of an investment.
D. The volatility of an investment’s returns.
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19. Which hedge fund strategy involves betting on price discrepancies during mergers?
A. Event-driven.
B. Global macro.
C. Relative value.
D. Arbitrage.
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20. A “collateralized debt obligation” (CDO) is:
A. A derivative based on interest rate swaps.
B. A structured product backed by a pool of debt securities.
C. A real estate investment trust.
D. A type of equity index fund.
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21. In the Black-Scholes model, which variable represents volatility?
A. S.
B. K.
C. r.
D. σ (sigma).
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22. Which of the following is a disadvantage of investing in commodities?
A. Lack of liquidity.
B. High correlation with equities.
C. No intrinsic value or cash flows.
D. Lack of price transparency.
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23. A “covered call” strategy involves:
A. Buying a call option and holding the underlying asset.
B. Selling a call option while holding the underlying asset.
C. Writing a call without any underlying exposure.
D. Combining a call and put with the same strike price.
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24. A “swap curve” is based on:
A. Government bond yields.
B. Credit spreads.
C. Interest rate swaps.
D. Stock market indices.
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25. Which of the following is an advantage of private equity over public equity?
A. Higher liquidity.
B. Greater regulatory oversight.
C. Access to early-stage growth opportunities.
D. Frequent mark-to-market pricing.
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26. What is the primary driver of returns in managed futures strategies?
A. Leverage.
B. Momentum and trend-following strategies.
C. High-frequency trading.
D. Arbitrage opportunities.
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27. Which of the following represents the intrinsic value of a put option?
A. Spot price minus strike price, if positive.
B. Strike price minus spot price, if positive.
C. Option premium plus time value.
D. Volatility multiplied by the time to expiration.
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28. What is “roll yield” in commodity futures investing?
A. The gain or loss from rolling over an expiring futures contract to a new one.
B. The difference between the spot price and the forward price.
C. The return from changes in commodity demand.
D. The profit from arbitrage opportunities.
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29. A hedge fund pursuing a “long/short equity” strategy will:
A. Only buy stocks.
B. Only short stocks.
C. Combine long and short positions to exploit mispricings.
D. Use fixed-income derivatives exclusively.
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30. Which of the following is NOT a characteristic of an ETF?
A. Traded on an exchange.
B. Actively managed portfolio.
C. Low expense ratios.
D. Can track alternative assets.