Question 1

The measure of hedging effectiveness in a minimum variance hedge is the size of profit on the hedge.

Accepted Answer

A) True 
 B)False

Question 2

Find the optimal stock index futures hedge ratio if the portfolio is worth $1,200,000, the beta is 1.15 and the S&P 500 futures price is 450.70 with a multiplier of 250.

Accepted Answer

A)  10.65 
B)  12.25 
C)  6123.80 
D)  5325.05 
E)  none of the above 
A)  10.65 
B)  12.25 
C)  6123.80 
D)  5325.05 
E)  none of the above

Question 3

If the target beta exceeds the underlying's beta, then the manager will go long the futures contract.

Accepted Answer

A) True 
 B)False

Question 4

What happens to the basis through the contract's life?

Accepted Answer

A)  it initially decreases, then increases 
B)  it initially increases, then decreases 
C)  it remains relatively steady 
D)  it moves toward zero 
E)  none of the above 
A)  it initially decreases, then increases 
B)  it initially increases, then decreases 
C)  it remains relatively steady 
D)  it moves toward zero 
E)  none of the above

Question 5

An individual who plans to take a foreign vacation could hedge the risk of converting into the foreign currency by selling foreign currency futures.

Accepted Answer

A) True 
 B)False

Question 6

When a hedge is said to be a short hedge or a long hedge, it means that the position is short or long in futures.

Accepted Answer

A) True 
 B)False

Question 7

Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if the futures contract has a price of $90,000 and a modified duration of 8.5 years.

Accepted Answer

A)  16.27 
B)  15.93 
C)  7.42 
D)  11.11 
E)  none of the above 
A)  16.27 
B)  15.93 
C)  7.42 
D)  11.11 
E)  none of the above

Question 8

Which technique can be used to compute the minimum variance hedge ratio?

Accepted Answer

A)  duration analysis 
B)  present value 
C)  regression 
D)  all of the above 
E)  none of the above 
A)  duration analysis 
B)  present value 
C)  regression 
D)  all of the above 
E)  none of the above

Question 9

The relationship between the spot yield and the yield implied by the futures price is called

Accepted Answer

A)  the yield beta 
B)  the price sensitivity 
C)  the tail 
D)  the hedge ratio 
E)  none of the above 
A)  the yield beta 
B)  the price sensitivity 
C)  the tail 
D)  the hedge ratio 
E)  none of the above

Question 10

Alpha capture seeks to achieve excess returns from identifying underpriced securities while eliminating unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 11

The duration of the futures contract used in the price sensitivity hedge ratio is

Accepted Answer

A)  the duration of the spot bond being hedged using the futures price instead of the spot price 
B)  the duration of the deliverable bond using the spot price 
C)  the duration of the deliverable bond using the futures price 
D)  the duration of the overall bond portfolio 
E)  none of the above 
A)  the duration of the spot bond being hedged using the futures price instead of the spot price 
B)  the duration of the deliverable bond using the spot price 
C)  the duration of the deliverable bond using the futures price 
D)  the duration of the overall bond portfolio 
E)  none of the above

Question 12

A short hedger wants the basis to strengthen.

Accepted Answer

A) True 
 B)False

Question 13

A hedge that is expected to earn a net profit is called an anticipatory hedge.

Accepted Answer

A) True 
 B)False

Question 14

In which of the following situations would you use a short hedge?

Accepted Answer

A)  the planned purchase of a stock 
B)  the planned purchase of commercial paper 
C)  the planned issuance of bonds 
D)  the planned repurchase of stock to cover a short position 
E)  none of the above 
A)  the planned purchase of a stock 
B)  the planned purchase of commercial paper 
C)  the planned issuance of bonds 
D)  the planned repurchase of stock to cover a short position 
E)  none of the above

Question 15

A hedge in which the asset underlying the futures is not the asset being hedged is

Accepted Answer

A)  a cross hedge 
B)  an optimal hedge 
C)  a basis hedge 
D)  a minimum variance hedge 
E)  none of the above 
A)  a cross hedge 
B)  an optimal hedge 
C)  a basis hedge 
D)  a minimum variance hedge 
E)  none of the above

Question 16

All of the following are futures contract choice decisions related to hedging, except

Accepted Answer

A)  which future underlying asset 
B)  which strike price 
C)  which futures contract expiration 
D)  whether to go long or short 
E)  all of the above are futures contract choice decisions 
A)  which future underlying asset 
B)  which strike price 
C)  which futures contract expiration 
D)  whether to go long or short 
E)  all of the above are futures contract choice decisions

Question 17

A hedge of a specific stock's price with stock index futures will reduce both systematic and unsystematic risk.

Accepted Answer

A) True 
 B)False

Question 18

Suppose you buy an asset at $50 and sell a futures contract at $53. What is your profit at expiration if the asset price goes to $49? (Ignore carrying costs)

Accepted Answer

A)  -$1 
B)  -$4 
C)  $3 
D)  $4 
E)  none of the above 
A)  -$1 
B)  -$4 
C)  $3 
D)  $4 
E)  none of the above

Question 19

Hedging with futures contracts entails all of the following risks, except

Accepted Answer

A)  marking to market may require large cash outflows 
B)  changes in margin requirements 
C)  basis risk 
D)  quantity risk 
E)  all of the above are potential risks 
A)  marking to market may require large cash outflows 
B)  changes in margin requirements 
C)  basis risk 
D)  quantity risk 
E)  all of the above are potential risks

Question 20

A foreign currency long hedge with a $/¥ futures contract will be a foreign currency short hedge with a ¥/$ futures contract.

Accepted Answer

A) True 
 B)False

The measure of hedging effectiveness in a minimum variance hedge is the size of profit on the hedge.

Find the optimal stock index futures hedge ratio if the portfolio is worth $1,200,000, the beta is 1.15 and the S&P 500 futures price is 450.70 with a multiplier of 250.

If the target beta exceeds the underlying's beta, then the manager will go long the futures contract.

What happens to the basis through the contract's life?

An individual who plans to take a foreign vacation could hedge the risk of converting into the foreign currency by selling foreign currency futures.

When a hedge is said to be a short hedge or a long hedge, it means that the position is short or long in futures.

Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if the futures contract has a price of $90,000 and a modified duration of 8.5 years.

Which technique can be used to compute the minimum variance hedge ratio?

The relationship between the spot yield and the yield implied by the futures price is called

Alpha capture seeks to achieve excess returns from identifying underpriced securities while eliminating unsystematic risk.

The duration of the futures contract used in the price sensitivity hedge ratio is

A short hedger wants the basis to strengthen.

A hedge that is expected to earn a net profit is called an anticipatory hedge.

In which of the following situations would you use a short hedge?

A hedge in which the asset underlying the futures is not the asset being hedged is

All of the following are futures contract choice decisions related to hedging, except

A hedge of a specific stock's price with stock index futures will reduce both systematic and unsystematic risk.

Suppose you buy an asset at $50 and sell a futures contract at $53. What is your profit at expiration if the asset price goes to $49? (Ignore carrying costs)

Hedging with futures contracts entails all of the following risks, except

A foreign currency long hedge with a $/¥ futures contract will be a foreign currency short hedge with a ¥/$ futures contract.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters

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

The measure of hedging effectiveness in a minimum variance hedge is the size of profit on the hedge.

Find the optimal stock index futures hedge ratio if the portfolio is worth $1,200,000, the beta is 1.15 and the S&P 500 futures price is 450.70 with a multiplier of 250.

If the target beta exceeds the underlying's beta, then the manager will go long the futures contract.

What happens to the basis through the contract's life?

An individual who plans to take a foreign vacation could hedge the risk of converting into the foreign currency by selling foreign currency futures.

When a hedge is said to be a short hedge or a long hedge, it means that the position is short or long in futures.

Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if the futures contract has a price of $90,000 and a modified duration of 8.5 years.

Which technique can be used to compute the minimum variance hedge ratio?

The relationship between the spot yield and the yield implied by the futures price is called

Alpha capture seeks to achieve excess returns from identifying underpriced securities while eliminating unsystematic risk.

The duration of the futures contract used in the price sensitivity hedge ratio is

A short hedger wants the basis to strengthen.

A hedge that is expected to earn a net profit is called an anticipatory hedge.

In which of the following situations would you use a short hedge?

A hedge in which the asset underlying the futures is not the asset being hedged is

All of the following are futures contract choice decisions related to hedging, except

A hedge of a specific stock's price with stock index futures will reduce both systematic and unsystematic risk.

Suppose you buy an asset at $50 and sell a futures contract at $53. What is your profit at expiration if the asset price goes to $49? (Ignore carrying costs)

Hedging with futures contracts entails all of the following risks, except

A foreign currency long hedge with a $/¥ futures contract will be a foreign currency short hedge with a ¥/$ futures contract.

Introduction

Structure of Options Markets

Principles of Option Pricing

Option Pricing Models: The Binomial Model

Option Pricing Models: The Black-Scholes-Merton Model

Basic Option Strategies

Advanced Option Strategies

Structure of Forward and Futures Markets

Principles of Pricing Forwards, Futures and Options on Futures

Futures Arbitrage Strategies

Swaps

Interest Rate Forwards and Options

Advanced Derivatives and Strategies

Financial Risk Management Techniques and Appplications

Managing Risk in an Organization

Filters