Futures Midterm

The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position.  The basis increases unexpectedly. Which of the following is TRUE?  a. The hedger’s position stays the same. b. The hedger’s position improves. c. The hedger’s position sometimes worsens and sometimes improves. d. The hedger’s position worsens.

The basis is defined as the spot price minus the futures price. A trader is hedging the sale of an asset with a short futures position.  The basis falls unexpectedly. Which of the following is TRUE?  a. The hedger’s position worsens. b. The hedger’s position improves. c. The hedger’s position stays the same. d. The hedger’s position sometimes worsens and sometimes improves.

The basis is defined as spot minus futures prices.   Evaluate which of the following is most likely to contribute to an increase in basis risk.   Select one alternative   A large difference between the futures prices when the hedge is put in place and when it is closed out.   Increased similarity between the underlying asset of the futures contract and the hedger’s exposure.   An increase in the time between the date when the futures contract is closed and its delivery month.   None of the other answers.

Give typing answer with explanation and conclusion In futures markets a hedger: a. can be a funds manager and tries to realise risk-free returns taking advantage of price differentials between different markets b. Usually represents hedge funds and trying to implement sophisticated strategies to earn abnormal returns c. can buy and sell futures contracts multiple times during the day adding depth and liquidity to the markets d. can represent a superannuation fund and buys VIX futures anticipating high volatility in coming months

A risk manager uses a futures contract, which has a correlation of 0.88 with the spot asset, to hedge her exposure. She calculates a hedge ratio of 0.9429. What part of the cash flow remains unhedged? None of these O 5.71% O 77.44% 22.56%

Which of the following increases basis risk? Select one: O a. Alarge difference between the futures prices when the hedge is put in place and when it is closed out O b. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure Oc. A reduction in the time between the date when the futures contract is closed and its delivery month O d. None of the above

An investor would want to __________ to exploit an expected fall in interest rates.    Group of answer choices   buy wheat futures sell treasury bond futures buy treasury bond futures sell S&P 500 index futures

After paying the initial margin, a futures investor does not have to pay any additional money until the investor's equity position falls below zero. True False

3. Why is the initial value of a futures contract zero? a. impossible to tell b. the futures is immediately marked-to-market c. you do not pay anything for it d. the basis will converge to zero e. the expected profit is zero

What is a normal market for futures? What does an inverted futures curve indicate?           (b) Consider the price quotes for oil futures below. Is it normal or inverted? Why. i.e. does it indicate shortage of abundant supply of oil at the moment?               Oil future market is  NORMAL / INVERTED (highlight correct, or erase wrong answer)   Future curve indicate: SHORTAGE/ ABUNDANT SUPPLY of oil in the near future

Can you please help with the question in the picture attached? The answer should be only one and I’m quite confused. Thank you!

The market portfolio (M) has the expected rate of return E(rM) = 0.12. Security A is traded in the market. We know that E(rA) = 0.17 and βA = 1.5. (1) What is the rate of return of the risk-free asset (rf)? (2) Security B is also traded in the market. βB = 0.8. Then what is “fair” expected rate of return of security B according to the CAPM? (3) Security C is a third security traded in the market. βC = 0.6, and from the market price, investors calculate E(rC) = 0.1. Is C overpriced or underpriced? What is αC?

Suppose you observe the following situation: Security Beta Expected Return Pete Corp. 1.70 0.180 Repete Col 1.39 0.153 What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places) Risk-free rate % Assume these securities are correctly priced. Based on the CAPM, what is the expected return on the market? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected Return on Market Pete Corp. Repete Co.%

Which of the following is a reason for hedging a long-only portfolio with an index futures? The investor believes the stocks in the portfolio will perform better than the market but is uncertain about the future performance of the market The investor believes the stocks in the portfolio will perform better than the market and the market is expected to do well The portfolio is not well diversified and so its return is uncertain All OO00

D3) Finance a) What does the option delta refer to? For a standard European put option, draw the graph of the delta as a function of the price of the underlying asset. b) You have delta hedged a long call position on a stock. The stock price drops. Explain how you would adjust your hedge

Suppose you observe the following situation on two securities:Security           Beta   Expected Return Pete Corp.       0.8      0.12 Repete Corp.   1.1      0.16 Assume these two securities are correctly priced. Based on the CAPM, what is the return on the market?

financial risk management  1. The KLSE CI is at 1250. The value of your portfolio is RM2.5million. If you wish to hedge against a marketdownturn as completely as possible, do you buy or sell futures contract? 2. The buyer of the option is not obligated to complete the deal and will do so only if changes in price make it profitable to do so. ( True/ False)

Futures trading halts when daily price limits are reached. True False

A position in T-bond futures should be used to hedge falling interest ---- rates and a position in T-bond futures should be used to hedge falling bond prices. O long; short O long; long O short; long O short; short O None of the options are correct.