91Ó°ÊÓ

Explain what is meant by basis risk when futures contracts are used for hedging.

Explain what is meant by a perfect hedge. Does a perfect hedge always lead to a better outcome than an imperfect hedge? Explain your answer.

Under what circumstances does a minimum variance hedge portfolio lead to no hedging at all?

Give three reasons that the treasurer of a company might not hedge the company's exposure to a particular risk.

Suppose that the standard deviation of quarterly changes in the prices of a commodity is \(\$ 0.65,\) the standard deviation of quarterly changes in a futures price on the commodity is \(\$ 0.81,\) and the coefficient of correlation between the two changes is \(0.8 .\) What is the optimal hedge ratio for a 3 -month contract? What does it mean?

A company has a \(\$ 20\) million portfolio with a beta of \(1.2 .\) It would like to use futures contracts on the S\&P 500 to hedge its risk. The index is currently standing at \(1080,\) and each contract is for delivery of \(\$ 250\) times the index. What is the hedge that minimizes risk? What should the company do if it wants to reduce the beta of the portfolio to \(0.6 ?\)

In the Chicago Board of Trade's corn futures contract, the following delivery months are available: March, May, July, September, and December. State the contract that should be used for hedging when the expiration of the hedge is in (a) June, (b) July, and (c) January.

In the Chicago Board of Trade's com futures contract, the following delivery months are available: March, May, July, September, and December. State the contract that should be used for hedging when the expiration of the hedge is in (a) June, (b) July, and (c) January.

Does a perfect hedge always succeed in locking in the current spot price of an asset for a future transaction? Explain your answer.

Explain why a short hedger's position improves when the basis strengthens unexpectedly and worsens when the basis weakens unexpectedly.