Question 1

The basis is defined as spot price minus futures price. For a short hedger, basis strengthens unexpectedly. Which of the following is true? choose one)

Accepted Answer

A)  The hedger's position improves. 
B)  The hedger's position worsens. 
C)  The hedger's position sometimes worsens and sometimes improves. 
D)  The hedger's position stays the same. 
A)  The hedger's position improves. 
B)  The hedger's position worsens. 
C)  The hedger's position sometimes worsens and sometimes improves. 
D)  The hedger's position stays the same. A

Question 2

On March 1, the price of oil is $60 and the July futures price is $59. On June 1, the price of oil is $64 and the July futures price is $63.50. A company entered into a futures contract on March 1 to hedge the purchase of oil on June 1. It closed out its position on June 1. After taking account of the cost of hedging, what is the effective price paid by the company for the oil? _ _ _ _ _ _

Accepted Answer

$59.50

Question 3

On March 1, the price of gold is $1000 and the December futures price is $1015. On November 1, the price of gold is $980 and the December futures price is $981. A gold producer entered into a December futures contract on March 1 to hedge the sale of gold on November 1. It closed out its position on November 1. After taking account of the cost of hedging, what is the effective price received by the company for the gold? _ _ _ _ _ _

Accepted Answer

$1014

Question 4

Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? choose one)

Accepted Answer

A)  The June contract 
B)  The July contract 
C)  The May contract 
D)  The August contract 
A)  The June contract 
B)  The July contract 
C)  The May contract 
D)  The August contract

Question 5

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on the S&P/ASX 200 Index is 4800. Futures contracts on $25 times the index can be traded. What trade is necessary to achieve the following? Indicate the number of contracts that should be traded and whether the position is long or short.)
i) Eliminate all systematic risk in the portfolio _ _ _ _ _ _ _ _ _ _
ii) Reduce the beta to 0.9 _ _ _ _ _ _ _ _ _ _
iii) Increase the beta to 1.8 _ _ _ _ _ _ _ _ _ _

Accepted Answer

i): 360 sh

Question 6

Which of the following is true? choose one.

Accepted Answer

A)  The optimal hedge ratio is the slope of the best-fit line when the spot price on the $y$ -axis) is regressed against the futures price on the
$x$ -axis). 
B)  The optimal hedge ratio is the slope of the best-fit line when the futures price on the $y$ -axis) is regressed against the spot price on the
$x$ -axis). 
C)  The optimal hedge ratio is the slope of the best-fit line when the change in the spot price on the $y$ -axis) is regressed against the change in the futures price on the
$x$ -axis). 
D)  The optimal hedge ratio is the slope of the best-fit line when the change in the futures price on the $y$ -axis) is regressed against the change in the spot price on the
$x$ -axis). 
A)  The optimal hedge ratio is the slope of the best-fit line when the spot price on the $y$ -axis) is regressed against the futures price on the
$x$ -axis). 
B)  The optimal hedge ratio is the slope of the best-fit line when the futures price on the $y$ -axis) is regressed against the spot price on the
$x$ -axis). 
C)  The optimal hedge ratio is the slope of the best-fit line when the change in the spot price on the $y$ -axis) is regressed against the change in the futures price on the
$x$ -axis). 
D)  The optimal hedge ratio is the slope of the best-fit line when the change in the futures price on the $y$ -axis) is regressed against the change in the spot price on the
$x$ -axis).

Question 7

Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one-month exposure to the price of commodity A? _ _ _ _ _ _

Accepted Answer

The answer of Suppose that the standard deviation of monthly...

Question 8

Tailing the hedge is: choose one)

Accepted Answer

A)  A strategy where the hedge position is increased at the end of the life of the hedge 
B)  A strategy where the hedge position is increased at the end of the life of the futures contract 
C)  A more exact calculation of the hedge ratio when forward contracts are used for hedging 
D)  None of the above 
A)  A strategy where the hedge position is increased at the end of the life of the hedge 
B)  A strategy where the hedge position is increased at the end of the life of the futures contract 
C)  A more exact calculation of the hedge ratio when forward contracts are used for hedging 
D)  None of the above

The basis is defined as spot price minus futures price. For a short hedger, basis strengthens unexpectedly. Which of the following is true? choose one)

Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? choose one)

Which of the following is true? choose one.

Tailing the hedge is: choose one)

Introduction

Mechanics of Futures Markets

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures 7 Swaps

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Non-Standard Products

Credit Derivatives

Weather, Energy and Insurance Derivatives

Filters

Exam 3: Hedging Strategies Using Futures

The basis is defined as spot price minus futures price. For a short hedger, basis strengthens unexpectedly. Which of the following is true? choose one)

Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? choose one)

Which of the following is true? choose one.

Tailing the hedge is: choose one)

Introduction

Mechanics of Futures Markets

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures 7 Swaps

Swaps

Securitization and the Credit Crisis of 2007

Mechanics of Options Markets

Properties of Stock Options

Trading Strategies Involving Options

Introduction to Binomial Trees

Valuing Stock Options: the Black-Scholes-Merton Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk

Interest Rate Options

Exotic Options and Other Non-Standard Products

Credit Derivatives

Weather, Energy and Insurance Derivatives

Filters