CHAPTER 3 Hedging Strategies Using Futures Practice Questions Problem In the Chicago Board of Trade's corn futures contract, the following delivery. A long futures hedge is appropriate when you know you will purchase an asset in the future and want to lock in the price; A short futures hedge is appropriate. Bible of Futures - Concept of Hedging Class Hedging Strategies Using Futures. ICFM. Loading.
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March, May, July, September, and December.
State the contract that should be used for hedging when the expiration of the hedge is in a June b July c January A good rule of hedging strategies using futures is to choose a futures contract that has a delivery month as close as possible to, but later than, the month containing the expiration of the hedge.
The contracts that should be used are therefore a July b Hedging strategies using futures c March Problem 3.
CHAPTER 3 Hedging Strategies Using Futures Practice Questions | Oi Kosol -
Does a perfect hedge always succeed in locking in the current spot price of an asset for a future transaction? Consider, for example, the use of a forward contract to hedge a known cash inflow in hedging strategies using futures foreign currency.
The forward hedging strategies using futures locks in the forward exchange rate, which is in general different from the spot exchange rate. The basis is the amount by which the spot price exceeds the futures price.
A short hedger is long the asset and short futures contracts. The value of his or her position therefore improves as the basis increases.
Similarly it worsens as the basis decreases. Imagine you are the treasurer of a Japanese company exporting electronic hedging strategies using futures to the United States.
Discuss how you would design a foreign exchange hedging strategy and the arguments you would use to sell the strategy to your fellow executives.
The simple answer to this question is that the treasurer should 1. Enter into forward and futures contracts to lock in the exchange rate for the U.
However, this is not the whole story. As the gold jewelry example in Table 3.
Derivatives and Risk Management by Sundaram Janakiramanan
For example, will the company be able to raise the price of its product in U. If the company can do so, its foreign exchange exposure may be quite low.
Once these estimates have been hedging strategies using futures the company can choose between using futures and options to hedge its risk. The results of the analysis should be presented carefully to other executives.
6 - Hedging Strategies Using Futures - Derivatives and Risk Management [Book]
It should be explained that a hedge does not ensure that profits will be higher. It means that profit will be hedging strategies using futures certain.
With options a premium is paid to eliminate only the downside. Suppose that in Example 3. How does the decision affect the way in which the hedge is implemented and the result?
If the hedge ratio is 0. It closes out its position on November The statement is not true.
The statement is true. Using the notation in the text, if the hedge ratio is 1. Since both F1 and b2 are known this has a variance of zero and must be the best hedge. A hedging strategies using futures that knows it will purchase a commodity in the future is able to lock in a price close to the futures price.