Exam 11: Forward and Futures Hedging, Spread, and Target Strategies

Find the profit if the investor buys a July futures at 75, sells an October futures at 78 and then reverses the July futures at 72 and the October futures at 77.

Find the profit if the investor enters an intramarket spread transaction by selling a September futures at $4.5, buys an December futures at $7.5 and then reverses the September futures at $5.5 and the December futures at $9.5.

Based on the minimum variance hedge ratio approach what is the hedging effectiveness, given the following information. The correlation coefficient between changes in the underlying instrument's price and changes in the futures contract price is 0.70, the standard deviation of the changes in the underlying position's value is 40%, and the standard deviation of the changes in the futures contract's price is 50%. (Select the closest answer.)

Which of the following measures is used in the price sensitivity hedge ratio for bond futures?

Based on the price sensitivity hedge ratio, if the yield beta increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.

The price sensitivity hedge ratio uses the durations of the spot and futures positions.

Which of the following correctly expresses the profit on a hedge?

An optimal hedge ratio is one in which the change in the futures price equals the change in the spot price.

A hedger should select a contract that expires the same month as the date on which the hedge is terminated.

The price sensitivity hedge ratio would be more appropriate for interest rate futures hedges than for commodity futures hedges.

The basis is the ratio of the futures price to the spot price.

Hedging can be viewed as a form of speculation, inasmuch as it involves taking a position that something bad will happen.

The liquidity of the futures contract used in a hedge is very important to the hedger.

Although a hedge might not be perfect, it should be partially effective if the spot and futures prices move in opposite directions.

Quantity risk is

A hedge reduces risk because the futures price is less volatile than the spot price.

Based on the minimum variance hedge ratio approach, what is the optimal number of futures contracts to deploy, given the following information. The correlation coefficient between changes in the underlying instrument's price and changes in the futures contract price is 0.95, the standard deviation of the changes in the underlying position's value is 300%, and the standard deviation of the changes in the futures contract's price is 11.4%.

The risk of the basis is usually less than the risk of the spot position.

Since it states that systematic risk cannot be eliminated, modern portfolio theory does not allow for stock index futures contracts.

When the futures expires before the hedge is terminated and the hedger moves into the next futures expiration, it is called