Question 1

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

Accepted Answer

An anticipatory hedge is one in which the spot position will be taken in the future. This means that the hedger is planning to take a position in the underlying asset at some point in the future, but hasn't done so yet. So, they use a futures contract to hedge their price risk. It is not necessarily based on expectations about the basis or profit on futures.

Question 2

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

Accepted Answer

To adjust the duration of a bond portfolio, you can use the formula: Number of contracts = (Target Duration - Current Duration) * (Portfolio Value / (Futures Price * Futures Duration)). Plugging in the given values: (10 - 8.5) * ($10,000,000 / ($93,000 * 9.25)) = 1.5 * (10,000,000 / 859,250) ≈ 17.44. Since we round up to the nearest whole contract, you would need to buy 17 contracts.

Question 3

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

Accepted Answer

A strengthening of the basis means that the difference between the spot price and the futures price decreases, which can happen if the spot price rises more than the futures price or if the futures price falls more than the spot price. This situation is generally beneficial for a short hedger, who has sold futures contracts to hedge against a decline in the price of the underlying asset.

Question 4

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

Accepted Answer

The answer of Suppose you buy an asset at $70...

Question 5

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

Accepted Answer

A cross hedge is a type of hedge where the underlying asset in the futures contract is different from the asset being hedged. This can be useful when an exact match for the underlying asset may not be available, but a similar asset can be used for hedging purposes.

Question 6

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

Accepted Answer

A short hedge involves taking a short position in futures contracts, which allows the hedger to protect against potential losses in the spot market. Therefore, choice B is the correct answer. The margin requirement is not waived in a short hedge, and the futures price can be higher or lower than the spot price.

Question 7

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

Accepted Answer

Regression analysis is the technique used to calculate the minimum variance hedge ratio. This involves regressing the returns of the hedged asset against the returns of the hedging instrument, and the slope of the resulting regression line is the hedge ratio that minimizes the variance of the portfolio. Duration analysis and present value are not directly used to calculate the minimum variance hedge ratio.

Question 8

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

Accepted Answer

Cross hedging involves using a futures contract on a different but related asset to hedge a position. If spot and futures prices are positively correlated, the futures contract can effectively offset price movements in the spot market, thereby reducing risk.

Question 9

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

Accepted Answer

The answer of You hold a stock portfolio worth $15...

Question 10

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

Accepted Answer

The duration of the futures contract used in the price sensitivity hedge ratio is the duration of the deliverable bond using the futures price. This is because the hedge ratio is based on matching the price sensitivity of the deliverable bond with that of the futures contract. In order to do this, both the bond and the futures contract must have the same duration.

Question 11

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

Accepted Answer

The optimal hedge ratio is calculated as (Portfolio Value * Beta) / (Futures Price * Multiplier). Substituting the given values: (1,200,000 * 1.15) / (450.70 * 250) = 12.25.

Question 12

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

Accepted Answer

The answer of Which of the following is not a...

Question 13

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

Accepted Answer

The loss on the bonds is $150,000 - $147,500 = $2,500. The gain on the futures is ($72,500 - $74,000) * 2 = -$3,000. The total profit is -$2,500 + $3,000 = $500.

Question 14

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

Accepted Answer

Rolling the hedge forward refers to the practice of moving from one futures contract to another as the previous one expires. This allows the hedger to maintain their position and minimize the risk of price fluctuations without having to terminate the hedge completely. This is a common strategy in commodity markets where futures contracts have specific expiration dates.

Question 15

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

Accepted Answer

The answer of Suppose you buy an asset at $50...

Question 16

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

Accepted Answer

The price sensitivity hedge ratio for bond futures is based on duration, which measures the sensitivity of a bond's price to changes in interest rates. Beta measures the volatility of a security relative to the overall market, correlation measures the relationship between two securities, and variance measures the dispersion of returns from their mean. None of these measures are directly used in the price sensitivity hedge ratio for bond futures.

Question 17

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

Accepted Answer

A short hedge is used to protect against a potential decrease in the value of an asset. In the case of planned issuance of bonds, a short hedge can be used to protect against the risk of interest rates rising, which would decrease the value of the bonds being issued.

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

Accepted Answer

The optimal hedge ratio is calculated using the formula: (Modified Duration of Bonds / Modified Duration of Futures) * (Value of Bonds / Price of Futures). Plugging in the values: (12.45 / 8.5) * (1,000,000 / 90,000) = 16.27.

Question 19

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

Accepted Answer

The answer of Which of the following statements about the...

Question 20

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

Accepted Answer

The answer of Find the profit if the investor buys...

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

An anticipatory hedge is one in which

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 strengthening of the basis means

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

A short hedge is one in which

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

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

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.

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

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.

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

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?

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

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)

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

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

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.

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

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.