In the context of options trading, theta is best described as:
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Correct Answer: B
Solution
B is correct. Theta measures time decay — the dollar amount by which an option's value decreases for each day (or unit of time) that passes, holding all other factors constant. It is typically negative for long options and positive for short option positions (the seller benefits from the passage of time).
Question 2
Medium
A quanto futures contract differs from a standard futures contract in which fundamental way?
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Correct Answer: D
Solution
D is correct. A quanto (quantity-adjusted) futures contract embeds a fixed exchange rate into the settlement mechanism. The payoff equals the change in the foreign asset's price multiplied by a fixed notional exchange rate, paid in the home currency. This allows the investor to capture the local-currency price return of the foreign asset without bearing exchange rate risk, because settlement is decoupled from the prevailing spot rate.
Question 3
Hard
In the curriculum's frictionless-markets discussion of the law of one price, which statement most accurately describes the appropriateness of currency hedging across asset types?
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Correct Answer: C
Solution
C is correct. The lesson shows that under the law of one price the home-currency return on an arbitragable asset is invariant to the currency in which the trade is denominated. Entering a forward at a rate that almost surely differs from the realized spot rate then introduces an FX bet on top of an asset position that was already currency-neutral in economic substance.
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