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Test Bank: Chapter 3 Hedging Strategies Using Futures 1. The basis is defined as spot minus futures.

For a short hedger basis strengthens unexpectedly. Which of the following is true (circle one) (a) The hedgers position improves. (b) The hedgers position worsens. (c) The hedgers position sometimes worsens and sometimes improves. (d) The hedgers position stays the same. . !n "arch 1 the price of oil is #$% and the &uly futures price is #'(. !n &une 1 the price of oil is #$) and the &uly futures price is #$*.'%. + company entered into a futures contracts on "arch 1 to hedge the purchase of oil on &une 1. ,t closed out its position on &une 1. +fter ta-ing account of the cost of hedging. what is the effective price paid by the company for the oil/ 0 0 0 0 0 0 *. !n "arch 1 the price of gold is #1.%%% and the 1ecember futures price is #1.%1'. !n 2ovember 1 the price of gold is #(3% and the 1ecember futures price is #(31. + gold producer entered into a 1ecember futures contracts on "arch 1 to hedge the sale of gold on 2ovember 1. ,t closed out its position on 2ovember 1. +fter ta-ing account of the cost of hedging. what is the effective price received by the company for the gold/ 0 0 0 0 0 0 ). 4uppose that the standard deviation of monthly changes in the price of commodity + is # . The standard deviation of monthly changes in a futures price for a contract on commodity 5 (which is similar to commodity +) is #*. The correlation between the futures price and the commodity price is %.(. What hedge ratio should be used when hedging a one month exposure to the price of commodity +/ 0 0 0 0 0 0 '. + company has a #*$ million portfolio with a beta of 1. . The futures price for a contract on the 467 index is (%%. Futures contracts on # '% times the index can be traded. What trade is necessary to achieve the following. (,ndicate the number of contracts that should be traded and whether the position is long or short.) (i) (ii) (iii) 8liminate all systematic ris- in the portfolio 0 0 0 0 0 0 0 0 0 0 9educe the beta to %.( 0 0 0 0 0 0 0 0 0 0 ,ncrease beta to 1.3 0 0 0 0 0 0 0 0 0 0

$. Futures contracts trade with every month as a delivery month. + company is hedging the purchase of the underlying asset on &une 1'. Which futures contract should it use (circle one) (a) The &une contract (b) The &uly contract (c) The "ay contract (d) The +ugust contract

:. Which of the following is true (circle 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). 3. Tailing the hedge is (circle one) (a) + strategy where the hedge position is increased at the end of the life of the hedge (b) + strategy where the hedge position is increased at the end of the life of the futures contract (c) + more exact calculation of the hedge ratio when forward contracts are used for hedging (d) 2one of the above