Question 1

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

Question 2

In the real-world,financial decisions are irrelevant,so there is really no reason for firms to hedge.

Accepted Answer

A) True 
 B)False

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

Question 4

You hold a bond portfolio worth $10 million and a modified duration of 8.5.What futures transaction would you do to raise the duration to 10 if the futures price is $93,000 and its implied modified duration is 9.25? Round up to the nearest whole contract.

Accepted Answer

A) buy 109 contracts 
B) buy 17 contracts 
C) buy 669 contracts 
D) sell 100 contracts 
E) sell 669 contracts

Question 5

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

Question 6

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 7

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

Question 8

A firm that expects to borrow in the future would use a short hedge to protect against interest rate changes.

Accepted Answer

A) True 
 B)False

Question 9

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

Question 10

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 11

A strengthening of the basis means

Accepted Answer

A) the spot price rises more than the futures price 
B) the futures price falls more than the spot price 
C) a short hedger benefits 
D) all of the above 
E) none of the above

Question 12

Based on the minimum variance hedge ratio approach what is the hedging effectiveness,given the following information.The correlation coefficient between changes in the underlying instrument's price and changes in the futures contract price is 0.70,the standard deviation of the changes in the underlying position's value is 40%,and the standard deviation of the changes in the futures contract's price is 50%.(Select the closest answer. )

Accepted Answer

A) 50% 
B) 45% 
C) 40% 
D) 35% 
E) 30%

Question 13

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

Question 14

A short hedger wants the basis to strengthen.

Accepted Answer

A) True 
 B)False

Question 15

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

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

Question 18

Find the profit if the investor enters an intramarket spread transaction by selling a September futures at $4.5,buys an December futures at $7.5 and then reverses the September futures at $5.5 and the December futures at $9.5.

Accepted Answer

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

Question 19

An investor who expects to purchase stock at a later date would use a short hedge to protect against stock price movements.

Accepted Answer

A) True 
 B)False

Question 20

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

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

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

In the real-world,financial decisions are irrelevant,so there is really no reason for firms to hedge.

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

You hold a bond portfolio worth $10 million and a modified duration of 8.5.What futures transaction would you do to raise the duration to 10 if the futures price is $93,000 and its implied modified duration is 9.25? Round up to the nearest whole contract.

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.

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

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

A firm that expects to borrow in the future would use a short hedge to protect against interest rate changes.

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.

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

A strengthening of the basis means

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

A short hedger wants the basis to strengthen.

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?

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?

Find the profit if the investor enters an intramarket spread transaction by selling a September futures at $4.5,buys an December futures at $7.5 and then reverses the September futures at $5.5 and the December futures at $9.5.

An investor who expects to purchase stock at a later date would use a short hedge to protect against stock price movements.

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.