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

At the expiration of a futures contract, futures prices converge to __.     a. Option prices b. forward prices c. market prices d. spot prices

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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

(a) Outline in detail what is meant by a forward and futures contract. Evaluate the relationship between futures price and spot price, and give reasons to justify the necessity for exchange margin accounts.   (b) Explain the concept of cost of carry model and its role in the pricing of financial futures contracts.