Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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%.

Accepted Answer

A) long 35 futures contracts 
B) long 25 futures contracts 
C) long 15 futures contracts 
D) short 25 futures contracts 
E) short 15 futures contracts 
A) long 35 futures contracts 
B) long 25 futures contracts 
C) long 15 futures contracts 
D) short 25 futures contracts 
E) short 15 futures contracts

Question 3

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

Accepted Answer

A) True 
 B)False

Question 4

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 5

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 6

A short hedge is one in which

Accepted Answer

A) the margin requirement is waived 
B) the hedger is short futures 
C) the hedger is short in the spot market 
D) the futures price is lower than the spot price 
E) none of the above 
A) the margin requirement is waived 
B) the hedger is short futures 
C) the hedger is short in the spot market 
D) the futures price is lower than the spot price 
E) none of the above

Question 7

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 8

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 9

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

Accepted Answer

A) True 
 B)False

Question 10

The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.

Accepted Answer

A) True 
 B)False

Question 11

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 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 15

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 16

Suppose you buy an asset at $70 and sell a futures contract at $72.What is your profit if,prior to expiration,you sell the asset at $75 and the futures price is $78?

Accepted Answer

A) -$1 
B) $2 
C) $1 
D) -$6 
E) none of the above 
A) -$1 
B) $2 
C) $1 
D) -$6 
E) none of the above

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Based on the price sensitivity hedge ratio approach,what is the optimal number of futures contracts to deploy,given the following information.The yield beta is 0.65,the present value of a basis point change for the underlying bond portfolio is $33,000,and the present value of a basis point change for the bond futures contract is $325.(Select the closest answer. )

Accepted Answer

A) long 100 futures contracts 
B) long 55 futures contracts 
C) short 66 futures contracts 
D) short 22 futures contracts 
E) short 11 futures contracts 
A) long 100 futures contracts 
B) long 55 futures contracts 
C) short 66 futures contracts 
D) short 22 futures contracts 
E) short 11 futures contracts

Question 19

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 20

If you plan to issue a liability in the future,you are currently short in the spot market.

Accepted Answer

A) True 
 B)False

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

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

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

Quantity risk is

A short hedge is one in which

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

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.

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

The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.

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

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

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

An anticipatory hedge is one in which

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

Suppose you buy an asset at $70 and sell a futures contract at $72.What is your profit if,prior to expiration,you sell the asset at $75 and the futures price is $78?

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

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

If you plan to issue a liability in the future,you are currently short in the spot market.

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

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

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

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

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

Quantity risk is

A short hedge is one in which

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

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.

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

The implied duration of a futures contract is the duration of the underlying bond measured as if one owned the bond today.

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

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

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

An anticipatory hedge is one in which

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

Suppose you buy an asset at $70 and sell a futures contract at $72.What is your profit if,prior to expiration,you sell the asset at $75 and the futures price is $78?

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

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

If you plan to issue a liability in the future,you are currently short in the spot market.

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

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