Deck 11: Forward and Futures Hedging, Spread, and Target Strategies

Question 1

Which of the following is not a reason for firms to hedge?

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

Answer 1

B

Question 2

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

A)beta
B)duration
C)correlation
D)variance
E)none of the above

Answer 2

B

Question 3

An anticipatory hedge is one in which

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

Answer 3

C

Question 4

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

A)the duration of the spot bond being hedged using the futures price instead of the spot price
B)the duration of the deliverable bond using the spot price
C)the duration of the deliverable bond using the futures price
D)the duration of the overall bond portfolio
E)none of the above

Question 5

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.

A)sell 130 contracts
B)sell 9,778 contracts
C)sell 20 contracts
D)buy 50,000 contracts
E)sell 50,000 contracts

Question 6

A strengthening of the basis means

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 7

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)

A)-$1
B)-$4
C)$3
D)$4
E)none of the above

Question 8

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

A)a cross hedge
B)an optimal hedge
C)a basis hedge
D)a minimum variance hedge
E)none of the above

Question 9

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.

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

Question 10

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.

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

Question 11

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

A)Implementing tactical asset allocation using futures is a form of market timing.
B)Futures can be used to synthetically buy or sell stocks but you cannot simultaneously adjust the beta or duration
C)A difference between the portfolio held and the index on which the futures is based will generate a gain for the investor.
D)The use of futures in tactical asset allocation will generate cash from the synthetic sale,which is then used in the synthetic purchase.
E)None of the above

Question 12

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

A)duration analysis
B)present value
C)regression
D)all of the above
E)none of the above

Question 13

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

A)futures prices are more volatile than spot prices
B)the spot and futures contracts are correctly priced at the onset
C)spot and futures prices are positively correlated
D)futures prices are less volatile than spot prices
E)none of the above

Question 14

A short hedge is one in which

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 15

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.

A)10.65
B)12.25
C)6123.80
D)5325.05
E)none of the above

Question 16

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)-$2,500
B)-$5,500
C)-$500
D)-$3,000
E)none of the above

Question 17

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

Question 18

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.

A)16.27
B)15.93
C)7.42
D)11.11
E)none of the above

Question 19

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

A)the planned purchase of a stock
B)the planned purchase of commercial paper
C)the planned issuance of bonds
D)the planned repurchase of stock to cover a short position
E)none of the above

Question 20

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

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 21

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

Question 22

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

Question 23

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

A)the yield beta
B)the price sensitivity
C)the tail
D)the hedge ratio
E)none of the above

Question 24

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.

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

Question 25

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

Question 26

A short hedger wants the basis to strengthen.

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

A)it initially decreases,then increases
B)it initially increases,then decreases
C)it remains relatively steady
D)it moves toward zero
E)none of the above

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

A)the basis when the hedge is closed
B)the change in the basis
C)the spot profit minus the futures profit
D)the futures profit minus the spot profit
E)none of the above

Question 37

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

Question 38

Quantity risk is

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 39

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.

Question 40

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.

Question 41

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

Question 42

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

Question 43

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

Question 44

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

Question 45

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

Question 46

A hedge of a specific stock's price with stock index futures will reduce both systematic and unsystematic risk.

Question 47

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

Question 48

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.

Question 49

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

Question 50

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