Practice Test Geeks(CFM) Certified Fund Manager Practice Test
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Derivatives & Hedging Strategies Flashcards

7 cards from real CFM practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.

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  1. A collar strategy on a long stock position is constructed by:

    Answer: Buying a put and selling a call at a higher strike

    A collar finances a protective put by selling an OTM call, capping upside while protecting downside at low or zero net cost.

  2. Vega measures an option's sensitivity to changes in:

    Answer: Implied volatility

    Vega quantifies how much the option price changes for a 1% change in implied volatility.

  3. Under the Black-Scholes model, which assumption is most frequently violated in practice?

    Answer: Volatility is constant over the option's life

    In practice, implied volatility changes over time and across strikes (volatility smile/skew), violating the constant-volatility assumption.

  4. A fund manager wants to convert a fixed-rate bond portfolio to a synthetic floating-rate exposure without selling the bonds. The best approach is to:

    Answer: Enter a pay-fixed, receive-floating interest rate swap

    By paying fixed and receiving floating in a swap, the manager offsets the fixed coupon income from bonds, creating a net floating-rate exposure.

  5. A variance swap pays the difference between realized variance and the swap's strike variance. Compared to a volatility swap, variance swaps are:

    Answer: More difficult to replicate and have convex payoff relative to volatility

    Variance swaps have a convex payoff relative to volatility (since variance = vol²), making them more sensitive to large moves and harder to hedge linearly.

  6. The cheapest-to-deliver (CTD) bond in a Treasury futures contract is the bond that:

    Answer: Maximizes the profit to the short futures position upon delivery

    The CTD bond is chosen by the short side to minimize delivery cost, effectively maximizing the profit (or minimizing the loss) on the delivery.

  7. A credit default swap (CDS) spread widening indicates that the market perceives the reference entity's credit risk has:

    Answer: Increased, raising the cost of default protection

    A wider CDS spread means buyers must pay more for protection, reflecting increased perceived probability of default.