True or False Question: Southwest Airlines is exposed to risk to fluctuations in jet fuel prices. One way they can partially hedge this risk is to short crude oil futures. (True or False)
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True or False Question: Southwest Airlines is exposed to risk to fluctuations in jet fuel prices. One way they can partially hedge this risk is to short crude oil futures. (True or False)
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- True or False Question: Southwest Airlines is exposed to risk to fluctuations in jet fuel prices. One way they can partially hedge this risk is to short crude oil futures.If a firm must pay for goods it has ordered with foreign currency, it can hedge its foreign exchange rate risk by Question 8 options: A) staying out of the exchange futures market. B) buying foreign exchange futures long. C) selling foreign exchange futures short. D) none of the above.Which of the following activities or transactions would most likely face right-way risk of counterparty? A. Purchasing a put option from an A-rated company on that company's stock. B. Entering a total return swap contract as the payer, who is paying the return from the reference asset and receiving a floating rate. C. Entering into a forward contract to buy West Texas Intermediate (WTI) crude oil from a large oil producer at a fixed price. D. Selling a put option to an A-rated company on that company's stock.
- What is a mismatch risk (for an IRS)? a. The major risk faced by a swap dealer-the risk that a counter party will default on its end of the swaps. b. The risk that a country will impose exchange rate restrictions that will interfere with performance on the swaps c. Interest rates might move against the swap bank after it has only gotten half of a swap on the books, or if it has an unhedged position d. The risk that it will be difficult to find counterpart that wants to borrow the right amount of money for the right amount of timeSome firms face risks that they cannot efficiently hedge using plain vanilla options. This motivates them to resort to exotic options. For example, consider a basket option where the underlying asset is the average between the FTSE 100 (main UK stock index) and the S&P 500 (main US index). This contract is well-suited for a company that has its investments equally split between the UK and US stock market. Other exotic options have an even more peculiar design (contract specification, payoff, etc.) so as to meet very particular hedging needs. What are the two most interesting examples you can think of? Describe the underlying risk that a firm wants to hedge and how the exotic option provides an efficient insurance against it.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
- 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? see photo Oil future market is NORMAL / INVERTED (highlight correct, or erase wrong answer) Future curve indicate: SHORTAGE/ ABUNDANT SUPPLY of oil in the near futureWhich is correct about security valuation? A. In an efficient market, several factors would affect the market and value is not necessarily equals the price. B. The value of the security is determined to compare it with the current market price and usually investor would buy when the value equals the price. C. Sellers would prefer the accept lower bid price than higher bid price to realize gains. D. Investors buy securities when securities are underpriced and sell them when it is overpriced. E. All of the above F. None of the abovea) News that U.S. auto safety regulators are investigating Tesla's Autopilot System caused a decrease in the tech-heavy Nasdaq-100 index last week1. Suppose a speculator thinks that the investigation won’t find any damning evidence against Tesla, and they predict the Nasdaq-100 index will increase in the future. Should the trader go long or short on a Nasdaq-100 futures contract? b) Following the same scenario from (a), the speculator decides to execute a trade of one E-Mini Nasdaq-100 futures contract with March 2022 expiry (contract size $20). Suppose the speculator opens their position at an index value of 14,900, and four weeks later closes their position at an index value of 15,400. Calculate the speculators profit/loss assuming they follow your advice in (a) (ignore brokerage fees).
- The futures market is referred to as an auction market, whereby producers and suppliers of commodities endeavour to avoid market volatility; in other words, producers and suppliers negotiate contracts with an investor who agrees to take on probable risk and reward, based on the expected volatility of the market. Critically discuss the theoretical concept of futures contracts as a risk management tool, used by any would be investor to decrease future risk exposure or market volatility. What were the main reasons for this fall into the negative realm? Critically discuss. After May 2020, what are the prospects of futures contracts as a significant risk management tool for firms? Discuss critically.What is a mismatch risk (for an IRS)? Select one: i. The risk that a country will impose exchange rate restrictions that will interfere with performance on the swaps ii. Interest rates might move against the swap bank after it has only gotten half of a swap on the books, or if it has an unhedged position ii. The major risk faced by a swap dealer - the risk that a counter party will default on its end of the swaps iv. The risk that it will be difficult to find counterpart that wants to borrow the right amount of money for the right amount of timeAn exploration and production company will produce and deliver natural gas in North Dakota, delivering into a pipeline in Wyoming. The company seeks to hedge its exposure to potential changes in the natural gas price it will receive. a) What type of basis risk does the company face? b) How might the company construct such a hedge?