Question 1

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

Accepted Answer

A) True 
 B)False  True

Question 2

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 A

Question 3

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

Accepted Answer

A) True 
 B)False  True

Question 4

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

Accepted Answer

A) spreading the hedge 
B) rolling the hedge forward 
C) optimally weighting the hedge 
D) all of the above 
E) none of the above 
A) spreading the hedge 
B) rolling the hedge forward 
C) optimally weighting the hedge 
D) all of the above 
E) none of the above

Question 5

You hold a stock portfolio worth $15 million with a beta of 1.05.You would like to lower the beta to 0.90 using S&P 500 futures,which have a price of 460.20 and a multiplier of 250.What transaction should you do? Round off to the nearest whole contract.

Accepted Answer

A) sell 130 contracts 
B) sell 9,778 contracts 
C) sell 20 contracts 
D) buy 50,000 contracts 
E) sell 50,000 contracts 
A) sell 130 contracts 
B) sell 9,778 contracts 
C) sell 20 contracts 
D) buy 50,000 contracts 
E) sell 50,000 contracts

Question 6

Though a cross hedge has somewhat higher risk than an ordinary hedge,it will reduce risk if which of the following occurs?

Accepted Answer

A) futures prices are more volatile than spot prices 
B) the spot and futures contracts are correctly priced at the onset 
C) spot and futures prices are positively correlated 
D) futures prices are less volatile than spot prices 
E) none of the above 
A) futures prices are more volatile than spot prices 
B) the spot and futures contracts are correctly priced at the onset 
C) spot and futures prices are positively correlated 
D) futures prices are less volatile than spot prices 
E) none of the above

Question 7

Quantity risk is

Accepted Answer

A) the difficulty in measuring the volatility 
B) the uncertainty about the size of the spot position 
C) the risk of mismatching the futures maturity to the spot maturity 
D) the possibility of regression error 
E) none of the above 
A) the difficulty in measuring the volatility 
B) the uncertainty about the size of the spot position 
C) the risk of mismatching the futures maturity to the spot maturity 
D) the possibility of regression error 
E) none of the above

Question 8

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.

Accepted Answer

A) -3 
B) -2 
C) 2 
D) 1 
E) none of the above 
A) -3 
B) -2 
C) 2 
D) 1 
E) none of the above

Question 9

What is the profit on a hedge if bonds are purchased at $150,000,two futures contracts are sold at $72,500 each,then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?

Accepted Answer

A) -$2,500 
B) -$5,500 
C) -$500 
D) -$3,000 
E) none of the above 
A) -$2,500 
B) -$5,500 
C) -$500 
D) -$3,000 
E) none of the above

Question 10

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 11

When the target duration is set at zero,the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.

Accepted Answer

A) True 
 B)False

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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 14

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 15

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

Accepted Answer

A) True 
 B)False

Question 16

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 17

Which of the following is not a reason for firms to hedge?

Accepted Answer

A) Firms can hedge less expensively than can their shareholders 
B) Shareholders cannot tolerate mark-to-market losses 
C) Hedging by corporations can have tax advantages 
D) Shareholders are not always aware of their firms' risks 
E) none of the above 
A) Firms can hedge less expensively than can their shareholders 
B) Shareholders cannot tolerate mark-to-market losses 
C) Hedging by corporations can have tax advantages 
D) Shareholders are not always aware of their firms' risks 
E) none of the above

Question 18

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 19

An anticipatory hedge is one in which

Accepted Answer

A) the basis is expected to fall 
B) the hedger expects to make a profit on the futures 
C) the spot position will be taken in the future 
D) all of the above 
E) none of the above 
A) the basis is expected to fall 
B) the hedger expects to make a profit on the futures 
C) the spot position will be taken in the future 
D) all of the above 
E) none of the above

Question 20

The minimum variance hedge ratio uses current information while the price sensitivity hedge ratio uses past information.

Accepted Answer

A) True 
 B)False

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

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

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

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

You hold a stock portfolio worth $15 million with a beta of 1.05.You would like to lower the beta to 0.90 using S&P 500 futures,which have a price of 460.20 and a multiplier of 250.What transaction should you do? Round off to the nearest whole contract.

Though a cross hedge has somewhat higher risk than an ordinary hedge,it will reduce risk if which of the following occurs?

Quantity risk is

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.

What is the profit on a hedge if bonds are purchased at $150,000,two futures contracts are sold at $72,500 each,then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?

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)

When the target duration is set at zero,the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.

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

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

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

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

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

Which of the following is not a reason for firms to hedge?

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

An anticipatory hedge is one in which

The minimum variance hedge ratio uses current information while the price sensitivity hedge ratio uses past information.

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

The 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 Applications

Managing Risk in an Organization

Filters

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

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

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

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

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

You hold a stock portfolio worth $15 million with a beta of 1.05.You would like to lower the beta to 0.90 using S&P 500 futures,which have a price of 460.20 and a multiplier of 250.What transaction should you do? Round off to the nearest whole contract.

Though a cross hedge has somewhat higher risk than an ordinary hedge,it will reduce risk if which of the following occurs?

Quantity risk is

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.

What is the profit on a hedge if bonds are purchased at $150,000,two futures contracts are sold at $72,500 each,then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?

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)

When the target duration is set at zero,the correct number of futures contracts to use is the same as is obtained from the price sensitivity hedge ratio.

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

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

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

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

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

Which of the following is not a reason for firms to hedge?

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

An anticipatory hedge is one in which

The minimum variance hedge ratio uses current information while the price sensitivity hedge ratio uses past information.

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

The 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 Applications

Managing Risk in an Organization

Filters