Which technique can be used to compute the minimum variance hedge ratio?
a. duration analysis
b. present value
c. regression
d. all of the above
e. none of the above
Answer: D
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FIN402 Chapter 11
- Based on the price sensitivity hedge ratio approach, what is the optimal number of futures contracts to deploy, given the following information. The yield beta is 0.65, the present value of a basis point change for the underlying bond portfolio is $33,000, and the present value of a basis point change for the bond futures contract is $325. (Select the closest answer.)
- You hold a stock portfolio worth $15 million with a beta of 1.05. You would like to lower the beta to 0.90 using S&P 500 futures, which have a price of 460.20 and a multiplier of 250. What transaction should you do? Round off to the nearest whole contract.
- Determine the optimal hedge ratio for Treasury bonds worth $1,000,000 with a modified duration of 12.45 if the futures contract has a price of $90,000 and a modified duration of 8.5 years.
- The relationship between the spot yield and the yield implied by the futures price is called
- Quantity risk is
- What happens to the basis through the contract's life?
- Which of the following correctly expresses the profit on a hedge?
- Though a cross hedge has somewhat higher risk than an ordinary hedge, it will reduce risk if which of the following occurs?
- Which of the following statements about the use of futures in tactical asset allocation is correct?
- You hold a bond portfolio worth $10 million and a modified duration of 8.5. What futures transaction would you do to raise the duration to 10 if the futures price is $93,000 and its implied modified duration is 9.25? Round up to the nearest whole contract.
- In which of the following situations would you use a short hedge?
- Find the optimal stock index futures hedge ratio if the portfolio is worth $1,200,000, the beta is 1.15 and the S&P 500 futures price is 450.70 with a multiplier of 250.
- What is the profit on a hedge if bonds are purchased at $150,000, two futures contracts are sold at $72,500 each, then the bonds are sold at $147,500 and the futures are repurchased at $74,000 each?
- Find the profit if the investor buys a July futures at 75, sells an October futures at 78 and then reverses the July futures at 72 and the October futures at 77.
- Which of the following is not a reason for firms to hedge?
- Suppose you buy an asset at $50 and sell a futures contract at $53. What is your profit at expiration if the asset price goes to $49? (Ignore carrying costs)
- Which of the following measures is used in the price sensitivity hedge ratio for bond futures?
- The duration of the futures contract used in the price sensitivity hedge ratio is
- When the futures expires before the hedge is terminated and the hedger moves into the next futures expiration, it is called
- A hedge in which the asset underlying the futures is not the asset being hedged is
- A strengthening of the basis means
- An anticipatory hedge is one in which
- A short hedge is one in which
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