Exam 5: Hedging With Futures Forwards

You own an equity portfolio that has a value of $10,000 and a beta of 1.2. The futures price per contract is currently $1,000. How many futures contracts do you need to sell to bring your equity portfolio's beta to a value of 1?

The covariance of changes between the spot price and futures price is 4. The standard deviation of changes in the futures price is 2. The optimal hedge ratio is

When the correlation between two assets is exactly $- 1$ , which of the following statements is true?

If the minimum-variance hedge ratio is +1, then which of the following is true?

If the futures contract used to hedge a spot position is marked-to-market daily, then the minimum-variance hedge ratio formula $h ^ { * } = \rho \times \sigma ( \Delta S ) / \sigma ( \Delta F )$ computed ignoring daily resettlement is, in absolute terms,

If changes in spot and futures prices are uncorrelated, then

Suppose you want to hedge a futures contract A with another futures contract B. You calculate the minimum-variance hedge ratio ignoring daily resettlement (for example, by regressing daily changes in Contract A's prices on daily changes in Contract B's prices). Suppose, however, that both contracts are marked-to-market daily. Which of the following statements is always true?

"Basis" risk may arise in a hedging situation if

You are hedging a spot position with futures. If the spot asset is less volatile than the futures, and there is basis risk, which of the following is surely false:

If changes in spot and futures prices have a correlation of $- 1$ , then

What must be the daily interest rate (expressed in continuously-compounded and annualized terms) for the tailed hedge ratio to be 90% of the untailed one for a one-year hedge? Assume a hedging horizon of 365 days.

The tailed hedge ratio becomes lower in comparison to the untailed one when

If the minimum-variance hedge ratio is $- 1$ , then which of the following statements is true?

A US-based corporation has decided to make an investment in Norwegian Kroner of NOK 500 Million (NOK = Norwegian Kroner) in 3 months. The company wishes to hedge changes in the the US dollar-NOK exchange rate using forward contracts on either the euro (EUR) or the Swiss Franc (CHF). The company makes the following estimates: -If EUR forwards are used: The standard deviation of quarterly changes in the USD/NOK spot exchange rate is 0.005, the standard deviation of quarterly changes in the USD/EUR forward rate is 0.025, and the correlation between the changes is 0.90. -If CHF forwards are used: The standard deviation of quarterly changes in the USD/NOK spot exchange rate is 0.005, the standard deviation of quarterly changes in the USD/CHF forward rate is 0.020, and the correlation between the changes is 0.80. The current USD/NOK spot rate is 0.160 (i.e., USD 0.160 per NOK), the current 3-month USD/EUR forward rate is 1.36, and the current 3-month USD/CHF forward rate is 1.04. If the company wishes to carry out a minimum-variance hedge, which currency should it use for this purpose?

Using a linear regression of changes in spot asset prices on changes in futures asset prices, the minimum-variance hedge ratio may be obtained

You are hedging a spot position with futures. If the spot asset is more volatile than the corresponding futures, the minimum-variance hedge ratio is

The correlation between changes in price of a spot asset and futures asset is 99%. The standard deviation of changes in spot prices is $2, and that of futures prices is $3. What is the standard deviation of a position that is long 5 units of the spot asset and is optimally (i.e., minimum-variance) hedged by using futures?

Refer again to the data in Question 23. The minimum-variance hedge is a

The tailed hedge ratio (which takes into account daily resettlement of the futures contract) is smaller than the untailed one in absolute value. Which of these statements is true in relation to this mathematical fact?

Refer again to the data in Question 23. The minimum-variance hedge, if CHF were to be used for the hedge, is a forward contract calling for the delivery of