Chapter 3

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.

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

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

M3 The terms "contango" and "backwardation" are used to describe term structures of forward/futures prices (i.e., patterns of forward/futures prices of various maturities). Please explain the meanings of these two terms and the situations in which they occur (i.e., the reasons for them). Also, consider futures prices of gold. Do you expect them to be in contango or backwardation? Why?

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.

Which of the following increases basis risk? Select one: O a. A large 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 O c. Areduction in the time between the date when the futures contract is closed and its delivery month O d. None of the above

Problem 4d: State whether the following statements are true or false. In each case, provide a brief explanation. d. In a binomial world, if a stock is more likely to go up in price than to go down, an increase in volatility would increase the price of a call option and reduce the price of a put option. Note that a static position is a position that is chosen initially and not rebalanced through time.

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?

Question: There are three securities in the market. The following chart shows their possible payoffs: &n...   Edit question There are three securities in the market. The following chart shows their possible payoffs:    State Probabilityof Outcome Return on Security 1 Return on Security 2 Return on Security 3 1 .14 .199 .199 .049 2 .36 .149 .099 .099 3 .36 .099 .149 .149 4 .14 .049 .049 .199      a-1. What is the expected return of each security? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Answer 12.40% a-2. What is the standard deviation of each security? (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Answer 4.50% b-1. What are the covariances between the pairs of securities? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your…

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%

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

6. Explain why an option’s time value is greatest when the stock price is near the exercise price and why it nearly disappears when the option is deep in- or out-of-the- money.

Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows: Correlation = -1 Stock Rate of return B O Yes ● No Expected Return Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) % 6% 12% Standard Deviation 25% 75% b. Could the equilibrium rf be greater than rate of return?

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: Security Beta Expected Return Pete Corp. 1.50 0.160 Repete Co. 1.19 0.133 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. % What is the risk-free rate? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) Risk-free rate

D4

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.%