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1. Which of the followings reduce(s) credit risk in futures contracts?

(1) Standardization of futures contracts

(2) Trading in exchanges

(3) Marking to market

A. Only (1)

B. Only (2)

C. Only (3)

D. Only (1) and (3)

E. All of (1), (2) and (3)

2. Let’s distinguish the meanings of transaction types of Buy, Sell, Short and Cover. If you want to speculate on price movement and expect the price of a certain option is expected to fall, then which transaction do you have to do?

A. buy

B. sell

C. short

D. cover

3. What does “contract size” mean in derivatives trades?

A. Number of contracts

B. Dollar value of one contract

C. Dollar value of the total contracts

D. Number of unit that denominates the asset per one contract

4. Suppose you are a speculator and expecting the price of soybeans to fall in three months. (You don’t have soybeans) Which transaction do you have to make in the futures market?

A. Buy

B. Sell

C. Short

D. Cover

5. Suppose you are a fund manager and worrying about risk arising from the uncertain performance of the market as a whole. In order to reduce risk, which position of index futures do you have to take?

A. Buy

B. Sell

C. Short

D. Cover

6. Which of the following conditions does NOT cause the basis risk in hedge using futures?

a. Length of time to hedge is shorter than the length of time for futures to expire.

b. Length of time to hedge is longer than the length of time for futures to expire.

c. The underlying asset of futures is not the same as the asset to be hedged

d. The amount to be hedged is different from the amount of futures contracts

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Deanna Hettinger
Deanna HettingerLv2
27 Aug 2018

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Related questions

Today is May 2, and Bid and Ask are $1.2100/E and $1.2300/E. The August 21 and September 20 futures contracts are priced at is $1.2500 and $1.2600 respectively. Each contract controls 100,000E. You are receiving 418,000E in Euro revenues on September 9th. Assume that currently, the September 9th forward is $1.2560.

5. How would you properly hedge the revenues using futures contracts? Discuss why, how much you will be over or under-hedged, and the risks.
a. Buy 3 August Euro-futures contracts
b. Sell 3 August Euro-futures contracts
c. Sell 4 September Euro-futures contracts
d. Buy 4 September Euro-futures contracts
e. Sell 3 September Euro-futures contracts

6. If we properly hedge the above revenue, are we over-hedged or under-hedged, and what will cause the hedge to lose money? Explain why.
a. Over-hedged, an appreciation of the Euro relative to the forward
b. Over-hedged, a depreciation of the Euro relative to the forward
c. Under-hedged, an appreciation of the Euro relative to the forward
d. Under-hedged, a depreciation of the Euro relative to the forward
e. Nothing, the hedge will work perfectly

7. If on September 9th, the Bid and Ask are $1.2490/E and $1.2540/E, and the futures price is for the September 20 contract is $1.2550, did your hedge work perfectly, or did you make or lose money on the hedge?
a. Worked Perfectly (no gain or loss greater than $100)
b. Profit < $1000
c. Loss < $1000
d. Profit > $1000
e. Loss >$1000

8. Given the above results would we have been better off over-hedging or under-hedging? Retrospectively, (using the bid-ask and futures prices in problem 7) how many futures contracts should we have bought/sold to minimize gains and losses on the hedge (minimize hedge variance)?
a. Under-hedging; sell 3 contracts
b. Under-hedging; buy 3 contracts
c. Over-hedging; buy 5 contracts
d. Over-hedging; sell 5 contracts
e. Over-hedging; sell 6 contracts






9. Suppose instead that the resulting bid and ask are $1.2590/E and $1.2610/E, and the futures price is for the September 20 contract is $1.2620, (and you hedged using the proper number of contracts

The manager of a $35 million portfolio of domestic stocks with a beta of 1.20 would like to diversify internationally. He would like to sell $7 million of domestic stock and purchase $7 million of foreign stock. He learns that the he can do this using a futures contract on a foreign stock index. The index is denominated in dollars, thereby eliminating any currency risk. He would like the beta of the new foreign asset class to be 1.15. The domestic stock index futures contract is priced at $355,000 and can be assumed to have a beta of 1. The foreign stock index futures contract is priced at $285,000 and has a beta of 1.

a. Does the manager need to buy or sell domestic stock index futures?

b. How many contracts are needed to sell $7 million of domestic stock?

c. Does the manager need to buy or sell foreign stock index futures?

d. How many contracts are need to buy $7 million of foreign stock?

Determine the value of the portfolio if the domestic stock increases by 3%, the domestic stock futures contract increases by 2.6%, the foreign stock increases by 1.7% and the foreign stock futures contract increases by 1.9%

e. What is price of one new domestic stock futures contract?

f. What is the profit or loss on the domestic futures contracts (must state if gain or loss and the amount)?

g. What is price of one new foreign stock futures contract?

h. What is the profit or loss on the foreign futures contracts (must state if gain or loss and the amount)?

i. How much does the total domestic stock increase?

j. What is the total value of the portfolio (stock and futures contracts combined)?

1. Futures Contracts Describe the general charac- teristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts?

2. Futures Pricing How does the price of a financial futures contract change as the market price of the security it represents changes? Why?

3. Hedging with Futures Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk.

4. Treasury Bond Futures Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain

7. Hedging with Futures Assume a financial institution has more rate-sensitive assets than rate-sensitive liabilities. Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures contracts in order to hedge its exposure?

8. Hedging with Futures Assume a financial institution has more rate-sensitive liabilities than rate- sensitive assets. Would it be more likely to be adversely affected by an increase or a decrease in interest rates.

Should it purchase or sell interest rate futures contracts in order to hedge its exposure?

9. Hedging Decision Why do some financial insti- tutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure?

10. Long versus Short Hedge Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge?

11. Impact of Futures Hedge Explain how the probability distribution of a financial institution’s returns is affected when it uses interest rate futures to hedge. What does this imply about its risk?

12. Cross-Hedging Describe the act of cross-hedging. What determines the effectiveness of a cross-hedge?

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