Question

1.Which of the following is not the reason for Basic risk of hedging using futures?

a.
The asset whose price is to be hedge may not be exactly the same as the underlying asset of the futures contract

b. The asset whose price is to be hedge may not be exactly the same as the price of the futures contract

c. The hedger may not be certain of the exact date the asset will be bought or sold

d. The hedger may require the futures contract to be closed before its delivery month

2.Drag the right missing word into the text:

“To use futures to hedge market risk, investors are likely to take the position that  ______ the risk as far as possible.”

3.Drag the correct missing words into the text:

“An increase in the  ______ is referred to as a strengthening of the basis and a decrease in the basis is referred to as a weakening of the basis.”

4.Which of the following trading strategies are referred to hedging strategies using futures?

a. Trading on margin account

b. Buying low and selling high

c. Short hedges

d. Long hedges

5.When does cross-hedging happening?

a. When the hedger who hedge an asset using futures also takes part in other hedges involving other type of assets

b. When the asset underlying the futures contract is different to the asset whose price is being hedged

c. When the asset underlying the futures contract is the same as the asset whose price is being hedged

6.Which of the following statistics is not considered when calculating the minimum variance hedge ratio?

a. Coefficient of correlation

b. Variance

c. Covariance

Answer 1

1.

a.
The asset whose price is to be hedge may not be exactly the same as the underlying asset of the futures contract

2.

“To use futures to hedge market risk, investors are likely to take the position that offset/minimize the risk as far as possible.”

3.

“An increase in the basis is referred to as a strengthening of the basis and a decrease in the basis is referred to as a weakening of the basis.”

4.

d. Long hedges

5.

b. When the asset underlying the futures contract is different to the asset whose price is being hedged

6.

c. Covariance