Exam 10: Forward and Futures Hedging,spread,and Target Strategies

A hedge that involves the use of a futures contract on an instrument that is different from the instrument being hedged is called a cross hedge.

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.

Which of the following statements about the use of futures in tactical asset allocation is correct?

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

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.

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)

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

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

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

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

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

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

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

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

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

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

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

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

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.

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