Deck 3: Hedging Strategies Using Futures

Question 1

The basis is defined as spot price minus futures price. For a short hedger, basis strengthens unexpectedly. Which of the following is true? choose one)

A) The hedger's position improves.
B) The hedger's position worsens.
C) The hedger's position sometimes worsens and sometimes improves.
D) The hedger's position stays the same.

Answer 1

1: A)

Question 2

Futures contracts trade with every month as a delivery month. A company is hedging the purchase of the underlying asset on June 15. Which futures contract should it use? choose one)

A) The June contract
B) The July contract
C) The May contract
D) The August contract

Answer 2

B

Question 3

On March 1, the price of gold is $1000 and the December futures price is $1015. On November 1, the price of gold is $980 and the December futures price is $981. A gold producer entered into a December futures contract on March 1 to hedge the sale of gold on November 1. It closed out its position on November 1. After taking account of the cost of hedging, what is the effective price received by the company for the gold? _ _ _ _ _ _

Answer 3

$1014

Question 4

On March 1, the price of oil is $60 and the July futures price is $59. On June 1, the price of oil is $64 and the July futures price is $63.50. A company entered into a futures contract on March 1 to hedge the purchase of oil on June 1. It closed out its position on June 1. After taking account of the cost of hedging, what is the effective price paid by the company for the oil? _ _ _ _ _ _

Question 5

Suppose that the standard deviation of monthly changes in the price of commodity A is $2. The standard deviation of monthly changes in a futures price for a contract on commodity B which is similar to commodity A) is $3. The correlation between the futures price and the commodity price is 0.9. What hedge ratio should be used when hedging a one-month exposure to the price of commodity A? _ _ _ _ _ _

Question 6

Tailing the hedge is: choose one)

A) A strategy where the hedge position is increased at the end of the life of the hedge
B) A strategy where the hedge position is increased at the end of the life of the futures contract
C) A more exact calculation of the hedge ratio when forward contracts are used for hedging
D) None of the above

Question 7

Which of the following is true? choose one.

A) The optimal hedge ratio is the slope of the best-fit line when the spot price on the $y$ -axis) is regressed against the futures price on the
$x$ -axis).
B) The optimal hedge ratio is the slope of the best-fit line when the futures price on the $y$ -axis) is regressed against the spot price on the
$x$ -axis).
C) The optimal hedge ratio is the slope of the best-fit line when the change in the spot price on the $y$ -axis) is regressed against the change in the futures price on the
$x$ -axis).
D) The optimal hedge ratio is the slope of the best-fit line when the change in the futures price on the $y$ -axis) is regressed against the change in the spot price on the
$x$ -axis).

Question 8

A company has a $36 million portfolio with a beta of 1.2. The futures price for a contract on the S&P/ASX 200 Index is 4800. Futures contracts on $25 times the index can be traded. What trade is necessary to achieve the following? Indicate the number of contracts that should be traded and whether the position is long or short.)
i) Eliminate all systematic risk in the portfolio _ _ _ _ _ _ _ _ _ _
ii) Reduce the beta to 0.9 _ _ _ _ _ _ _ _ _ _
iii) Increase the beta to 1.8 _ _ _ _ _ _ _ _ _ _