Using an Option to Reduce the Risk of a Portfolio

question 80

Multiple Choice

Using an option to reduce the risk of a portfolio is called ________, while using options to bet on the direction of the market or an asset is called ________.

• A) hedging, speculation
• B) hedging, verification
• C) verification, hedging
• D) speculation, hedging

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Definitions:

Convexity

A measure of the curvature or the rate of change of the bond's duration as interest rates change, affecting the bond's price sensitivity to interest rate changes.

Yield

The income generated by an investment, often expressed as a percentage of the investment's cost or market value.

Basis Points

A financial measurement unit representing the percentage shift in the value or rate of a financial asset, which is equal to one hundredth of a percent.

Yield To Maturity

The total return anticipated on a bond if the bond is held until its maturity date, expressed as an annual rate.