Question 1

Which of the following best describes "stack and roll"?

Accepted Answer

A)  Creates long-term hedges from short term futures contracts 
B)  Can avoid losses on futures contracts by entering into further futures contracts 
C)  Involves buying a futures contract with one maturity and selling a futures contract with a different maturity 
D)  Involves two different exposures simultaneously 
A)  Creates long-term hedges from short term futures contracts 
B)  Can avoid losses on futures contracts by entering into further futures contracts 
C)  Involves buying a futures contract with one maturity and selling a futures contract with a different maturity 
D)  Involves two different exposures simultaneously A

Question 2

Which of the following is a reason for hedging a portfolio with an index futures?

Accepted Answer

A)  The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market 
B)  The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well 
C)  The portfolio is not well diversified and so its return is uncertain 
D)  All of the above 
A)  The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market 
B)  The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well 
C)  The portfolio is not well diversified and so its return is uncertain 
D)  All of the above A

Question 3

Which of the following increases basis risk?

Accepted Answer

A)  A large difference between the futures prices when the hedge is put in place and when it is closed out 
B)  Dissimilarity between the underlying asset of the futures contract and the hedger's exposure 
C)  A reduction in the time between the date when the futures contract is closed and its delivery month 
D)  None of the above 
A)  A large difference between the futures prices when the hedge is put in place and when it is closed out 
B)  Dissimilarity between the underlying asset of the futures contract and the hedger's exposure 
C)  A reduction in the time between the date when the futures contract is closed and its delivery month 
D)  None of the above B

Question 4

A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. Spot price and futures price are currently $100 and $90. The one year futures price of the commodity is $90. If the spot price and the futures price in one year turn out to be $112 and $110, respectively. What is the average price paid for the commodity?

Accepted Answer

A)  $92 
B)  $96 
C)  $102 
D)  $106 
A)  $92 
B)  $96 
C)  $102 
D)  $106

Question 5

Which of the following is true?

Accepted Answer

A)  Hedging can always be done more easily by a company's shareholders than by the company itself 
B)  If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge 
C)  If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging 
D)  If all companies in an industry do not hedge, a company is liable increase its risk by hedging 
A)  Hedging can always be done more easily by a company's shareholders than by the company itself 
B)  If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge 
C)  If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging 
D)  If all companies in an industry do not hedge, a company is liable increase its risk by hedging

Question 6

Which of the following is true?

Accepted Answer

A)  Gold producers should always hedge the price they will receive for their production of gold over the next three years 
B)  Gold producers should always hedge the price they will receive for their production of gold over the next one year 
C)  The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold 
D)  Gold producers can hedge by buying gold in the forward market 
A)  Gold producers should always hedge the price they will receive for their production of gold over the next three years 
B)  Gold producers should always hedge the price they will receive for their production of gold over the next one year 
C)  The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold 
D)  Gold producers can hedge by buying gold in the forward market

Question 7

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?

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 8

On March 1 a commodity's spot price is $60 and its August futures price is $59. On July 1 the spot price is $64 and the August futures price is $63.50. A company entered into futures contracts on March 1 to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective price (after taking account of hedging) paid by the company?

Accepted Answer

A)  $59.50 
B)  $60.50 
C)  $61.50 
D)  $63.50 
A)  $59.50 
B)  $60.50 
C)  $61.50 
D)  $63.50

Question 9

Which of the following is true?

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 10

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true?

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.

Question 11

Which of the following best describes the capital asset pricing model?

Accepted Answer

A)  Determines the amount of capital that is needed in particular situations 
B)  Is used to determine the price of futures contracts 
C)  Relates the return on an asset to the return on a stock index 
D)  Is used to determine the volatility of a stock index 
A)  Determines the amount of capital that is needed in particular situations 
B)  Is used to determine the price of futures contracts 
C)  Relates the return on an asset to the return on a stock index 
D)  Is used to determine the volatility of a stock index

Question 12

Which of the following does NOT describe beta?

Accepted Answer

A)  A measure of the sensitivity of the return on an asset to the return on an index 
B)  The slope of the best fit line when the return on an asset is regressed against the return on the market 
C)  The hedge ratio necessary to remove market risk from a portfolio 
D)  Measures correlation between futures prices and spot prices 
A)  A measure of the sensitivity of the return on an asset to the return on an index 
B)  The slope of the best fit line when the return on an asset is regressed against the return on the market 
C)  The hedge ratio necessary to remove market risk from a portfolio 
D)  Measures correlation between futures prices and spot prices

Question 13

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9?

Accepted Answer

A)  Long 192 contracts 
B)  Short 192 contracts 
C)  Long 48 contracts 
D)  Short 48 contracts 
A)  Long 192 contracts 
B)  Short 192 contracts 
C)  Long 48 contracts 
D)  Short 48 contracts

Question 14

Which of the following describes tailing the hedge?

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

Question 15

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8?

Accepted Answer

A)  Long 192 contracts 
B)  Short 192 contracts 
C)  Long 96 contracts 
D)  Short 96 contracts 
A)  Long 192 contracts 
B)  Short 192 contracts 
C)  Long 96 contracts 
D)  Short 96 contracts

Question 16

A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging?

Accepted Answer

A)  It leads to a better exchange rate being paid 
B)  It leads to a more predictable exchange rate being paid 
C)  It caps the exchange rate that will be paid 
D)  It provides a floor for the exchange rate that will be paid 
A)  It leads to a better exchange rate being paid 
B)  It leads to a more predictable exchange rate being paid 
C)  It caps the exchange rate that will be paid 
D)  It provides a floor for the exchange rate that will be paid

Question 17

Which of the following is necessary for tailing a hedge?

Accepted Answer

A)  Comparing the size in units of the position being hedged with the size in units of the futures contract 
B)  Comparing the value of the position being hedged with the value of one futures contract 
C)  Comparing the futures price of the asset being hedged to its forward price 
D)  None of the above 
A)  Comparing the size in units of the position being hedged with the size in units of the futures contract 
B)  Comparing the value of the position being hedged with the value of one futures contract 
C)  Comparing the futures price of the asset being hedged to its forward price 
D)  None of the above

Question 18

A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true?

Accepted Answer

A)  It is liable to experience liquidity problems if the price of silver falls dramatically 
B)  It is liable to experience liquidity problems if the price of silver rises dramatically 
C)  It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically 
D)  The operation of futures markets protects it from liquidity problems 
A)  It is liable to experience liquidity problems if the price of silver falls dramatically 
B)  It is liable to experience liquidity problems if the price of silver rises dramatically 
C)  It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically 
D)  The operation of futures markets protects it from liquidity problems

Question 19

On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November 1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a December futures contracts on March 1 to hedge the sale of the commodity on November 1. It closed out its position on November 1. What is the effective price (after taking account of hedging) received by the company for the commodity?

Accepted Answer

A)  $1,016 
B)  $1,001 
C)  $981 
D)  $1,014 
A)  $1,016 
B)  $1,001 
C)  $981 
D)  $1,014

Which of the following best describes "stack and roll"?

Which of the following is a reason for hedging a portfolio with an index futures?

Which of the following increases basis risk?

Which of the following is true?

Which of the following is true?

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?

Which of the following is true?

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true?

Which of the following best describes the capital asset pricing model?

Which of the following does NOT describe beta?

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9?

Which of the following describes tailing the hedge?

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8?

A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging?

Which of the following is necessary for tailing a hedge?

A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true?

Introduction

Futures Markets and Central Counterparties

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

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 Bsm Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options and Blacks Model

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk and Expected Shortfall

Interest Rate Options

Exotic Options and Other Nonstandard Products

Credit Derivatives

Weather, Energy, and Insurance Derivatives

Filters

Exam 3: Hedging Strategies Using Futures

Which of the following best describes "stack and roll"?

Which of the following is a reason for hedging a portfolio with an index futures?

Which of the following increases basis risk?

Which of the following is true?

Which of the following is true?

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?

Which of the following is true?

The basis is defined as spot minus futures. A trader is hedging the sale of an asset with a short futures position. The basis increases unexpectedly. Which of the following is true?

Which of the following best describes the capital asset pricing model?

Which of the following does NOT describe beta?

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to reduce beta to 0.9?

Which of the following describes tailing the hedge?

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on an index is 900. Futures contracts on $250 times the index can be traded. What trade is necessary to increase beta to 1.8?

A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging?

Which of the following is necessary for tailing a hedge?

A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true?

Introduction

Futures Markets and Central Counterparties

Interest Rates

Determination of Forward and Futures Prices

Interest Rate Futures

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 Bsm Model

Employee Stock Options

Options on Stock Indices and Currencies

Futures Options and Blacks Model

The Greek Letters

Binomial Trees in Practice

Volatility Smiles

Value at Risk and Expected Shortfall

Interest Rate Options

Exotic Options and Other Nonstandard Products

Credit Derivatives

Weather, Energy, and Insurance Derivatives

Filters