Which of the following increases basis risk? Select one: O a. A large difference between the futures prices when the hedge is put in place and when it is closed out O b. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure O c. Areduction in the time between the date when the futures contract is closed and its delivery month O d. None of the above

Which of the following increases basis risk? Select one: O a. A large difference between the futures prices when the hedge is put in place and when it is closed out O b. Dissimilarity between the underlying asset of the futures contract and the hedger's exposure O c. Areduction in the time between the date when the futures contract is closed and its delivery month O d. None of the above

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Financial Futures Markets: Explain how sellers of financial futures contracts can offset their position. How is their gain or loss determined? Note: there are 2 parts to this question.
A(n). OOO futures hedge is most likely to result in ongoing payments over the life of the foreign exchange instrument. options money market forward
Which derivative does not reduce financial risk?a. optionsb. swapsc. futuresd.forwardse. answer not given
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.
At the expiration of a futures contract, futures prices converge to __. a. Option prices b. forward prices c. market prices d. spot prices
When trading a call option on futures, you have the to buy the futures contract at the strike price before expiration. right, but not the obligation O obligation O right and also obligation
2
Can a derivative security's value be determined by an underlying single stock (e.g., IBM, MMM, GE)? If no, explain. Can a derivative security's value be determined by an underlying fixed income index? If yes, explain. What is the difference objective, if any, between a long futures contract, a put option contract, and a long forward contract? What are the two primary functions of derivative securities (i.e., what classifications of participants do they serve)? Finally, what does "market efficiency" suggest? Explain the significant advantage and disadvantage of Inflation Protected Treasury Bonds (TIPS). Who or what investor would likely prefer a municipal bond issued by the Commonwealth of Virginia? If a corporate bond yields 8%, to be competitive (e.g., indifferent), what would a municipal bond need to yield for an investor in the 40% tax bracket? In municipals, what, if any, is the difference between a general obligation and revenue bond? What is a pass-through security, a conforming…
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.
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
Assume that F, and Fy are the futures prices of two contracts on the same non-dividend-paying investment asset, with times to maturity T, and Tz, Tz > T1. Prove that therelationship between the two prices must be see image

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