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Practice Chap 3

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29 views2 pages

Practice Chap 3

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小美張
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CHAPTER 3 – HEDGING STRATEGIES USING FUTURES

I. Short concept question


3.1. Under what circumstances are short hedges and long hedges appropriate?

3.2. Give three reasons why the treasurer of a company might choose not to hedge a particular risk.

3.3. Explain how basis risk arises in hedging.

3.4. What is the formula for the minimum variance hedge ratio when daily settlement is ignored?

3.5. How is the formula for the minimum variance hedge ratio changed to take account of daily settlement?

3.6. How is the number of contracts used for hedging calculated from the minimum variance hedge ratio?

3.7. How can index futures be used to change the beta of a well-diversified portfolio?

3.8. How might investors who consider themselves adept at stock picking use index futures?

3.9. Explain what is meant by a perfect hedge. Does a perfect hedge always lead to a better outcome than an
imperfect hedge? Explain your answer.

3.10. Under what circumstances does a minimum variance hedge portfolio lead to no hedging at all?

II. Practice questions


3.11. Suppose that the standard deviation of quarterly changes in the prices of a commodity is $0.65, the
standard deviation of quarterly changes in a futures price on the commodity is $0.81, and the coefficient of
correlation between the two changes is 0.8. What is the optimal hedge ratio for a 3-month contract? What
does it mean?
3.12. Suppose that the standard deviation of monthly changes in the price of commodity A is $2.3. The
standard deviation of monthly changes in a futures price for a contract on commodity B (which is similar to
commodity A) is $3.2. The correlation between the futures price and the commodity price is 0.8. What hedge
ratio should be used when hedging a one-month exposure to the price of commodity A?
3.13. A company has a $20 million portfolio with a beta of 1.4. It would like to use futures contracts on a
stock index to hedge its risk. The index futures price is currently standing at 1080, and each contract is for
delivery of $250 times the index.
a. What is the hedge that minimizes risk?
b. What should the company do if it wants to reduce the beta of the portfolio to 0.7?
c. What should the company do if it wants to reduce the beta of the portfolio to 1.9?
3.14. A trader owns 55,000 units of a particular asset and decides to hedge the value of her position with
futures contracts on another related asset. Each futures contract is on 5,000 units. The spot price of the asset
that is owned is $28 and the standard deviation of the change in this price over the life of the hedge is
estimated to be $0.43. The futures price of the related asset is $27 and the standard deviation of the change
in this over the life of the hedge is $0.40. The coefficient of correlation between the spot price change and
futures price change is 0.95.
(a) What is the minimum variance hedge ratio?
(b) Should the hedger take a long or short futures position?
(c) What is the optimal number of futures contracts when adjustments for daily settlement are not considered?
(d) How can the daily settlement of futures contracts be taken into account?
3.15. On March 1 a commodity’s spot price is $140 and its August futures price is $139. On July 1 the spot
price is $144 and the August futures price is $143.50. A company entered into futures contracts on March 1
to hedge its purchase of the commodity on July 1. It closed out its position on July 1. What is the effective
price?
3.16 On March 1 the price of a commodity is $1,000 and the December futures price is $1,015. On November
1 the price is $980 and the December futures price is $981. A producer of the commodity entered into a
December futures contract on March 1 to hedge the sale of the commodity on November 1. It closed out its
position on November 1. What is the effective price?

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