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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 116 )

Updated On: 26-Jan-2026
Page 116 of 793
PDF with 3960 Questions

Steve Brown is questioned by his superior about the commonly cited criticisms and benefits of the derivatives market. Which of Brown's statements regarding the criticisms and benefits of derivative markets is most likely correct?

  1. Derivatives markets are often criticized for being too risky and illiquid for all but the most knowledgeable investors.
  2. Derivatives benefit financial markets due to the price discovery and risk management functions they provide.
  3. Derivatives benefit financial markets by generating high fees for dealers wilting to make a market in these securities.

Answer(s): B



Two portfolio managers at an investment management firm are discussing option strategies for their clients' portfolios. The first manager is considering a covered call strategy on Consolidated Steel Inc. (CSI). The manager states that the strategy is attractive since it will increase the expected returns from the anticipated appreciation in CSI, while reducing the downside risk. The second manager is considering a protective put strategy on Millwood Lumber Company (MLC). The manager states that the protective put strategy will allow his investors to retain an infinite profit potential while limiting potential losses to an amount equal to the initial stock price minus the put premium. Determine whether the comments made by the first and second manager are correct.

  1. Only the first manager is incorrect.
  2. Only the second manager is incorrect.
  3. Both the first manager and the second manager are incorrect.

Answer(s): C



An investor takes a long position in a corn futures contract. Initial margin on the contract is 10% of the contract value and maintenance margin is half of the initial margin. If, at the beginning of the second trading day for the contract, the investor receives a margin call, it is least likely that:

  1. variation margin is greater than maintenance margin.
  2. the final trade from the previous day is greater than the contract price.
  3. the average of the last few trades from the previous day is less than the contract price.

Answer(s): B



Anne Quincy took the short side of a forward contract on the S&P 500 Index three months ago in an attempt to hedge short-term changes in her index portfolio. The contract had a term of six months at the purchase date, a contract price of $ 1,221 and Mason Inc. as the counterparty. Quincy is now considering unwinding her short position using either a three-month Mason Inc. contract with a price of $1,220, a three-month JonesCo contract with a price of S1,219, or a three-month Redding Company contract with a price of $1,218. If Quincy wants to minimize credit risk, which of the following should she do? Take the long position in the contract with:

  1. JonesCo.
  2. Mason Inc.
  3. Redding Company.

Answer(s): B



An analyst is evaluating a European call option with a strike price of 25 and 219 days to expiration. The underlying stock is currently trading for $29, and the analyst thinks that by the option expiration date the stock will be valued at $35. If the risk-free rate is 4.0%, what is the lower bound on the value of this option?

  1. $0
  2. $4.00
  3. $4.58.

Answer(s): C



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