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? Question 3Answer a. The hedger’s position sometimes worsens and sometimes improves. b. The hedger’s position stays the same. c. The hedger’s position worsens. d. The hedger’s position improves.

All of the statements below are true of futures contractsexcept that futures contracts: O a. result in predictable gross profits. O b. result in predictable cash flows. O c. eliminate downside risk and upside potential. O d. eliminate downside risk while allowing for upside potential.

(a) What is the expected shape of a futures curve for cotton (a storable commodity)? What about for live hogs (a non-storable commodity)?  (b) Explain why a rational economic agent may still choose to hold stocks even if the expected return on stocks is negative.

Futures trading continues when daily price limits are reached,but only at prices that do not violate the daily minimum or maximum. True False

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.

Question 1. Let St be the current price of a stock that pays no dividends.  a)Let rbid be the interest rate at which one can invest/lend money, and roff be theinterest rate at which one can borrow money, rbid≤roff. Both rates are continuously compounded. Using arbitrage arguments, find upper and lower bounds for the forwardprice of the stock for a forward contract with maturity T > t. b)How does your answer change if the stock itself has bid price St,bid and offer price St,off?

What is the correct strategy when the asset backing the futures contract differs from the asset whose price is being hedged? O Short hedge O Long hedge O Perfect hedge O Tailing the hedge O Cross hedge

Organized exchanges offer important advantages like (a) mitigating credit risk and (b) providing liquidity. But they have the following market imperfections: 1. Open interest in futures contracts declines for longer maturities; so, for liquidity reasons, you may be unable to hedge longer deliveries using longer maturity futures contracts. Explain briefly how you would overcome these market imperfections.