Question

PART 1 - When you enter into a futures contract you have a:

		right
		obligation
		it depends on whether you are long (bought) or short (sold).
		all of the above.

PART 2 Using gasoline futures to hedge exposure to changes in the price of jet fuel is an example of:

		speculating.
		swap-hedging.
		cross-hedging.
		swing hedging.

PART 3 Speculators in futures markets provide liquidity which:

		raises transaction costs.
		lowers transaction costs.
		increases excess volatility.
		causes panics and crashes.

PART 4 You bought a put option for $5. The put option has a strike price of$50, and at expiration the stock is worth $60. What is your profit/loss?

		loss of $15
		loss of $5
		profit of $10
		profit of $15

Answer 1

Part 1: When you enter into a futures contract you have an obligation.

Explanation - In futures contract both the parties are obligated to perform their respective duties (buy/sell) as per the contract.

Part 2: Using gasoline futures to hedge exposure to changes in the price of jet fuel is an example of swing hedging

Swing hedging is used by investors in energy markets like oil, natural gas to protect against price changes in energy commodities.

Part 3: Speculators in futures markets provide liquidity which lowers transaction cost.

Explanation - Liquidity in the market simply means that assets can be bought or sold quickly in the market. Greater liquidity improves the pricing of stock and reduces the transaction cost by attracting more number of buyers/ sellers.

Part 4: You bought a put option for $5. The put option has a strike price of $50, and at expiration, the stock is worth $60. What is your profit/loss

Strike Price = $50

Premium = $5

Spot Price = $60

Under put option, the buyer of the put option has the right but he/ she is not obligated to sell the stock at the strike price. Since at expiration date the stock price is $60 which is greater than the strike price, So the put option will not exercise the option and will incur a loss of only $5 ( the premium price paid to purchase the put option)

Answer -> loss of $5