How many contacts will you need to enter to hedge

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Reference no: EM131844712

1. Suppose you are a U.S. investor who is harmed when the dollar depreciates. Specifically, suppose that your profits decrease by $200,000 for every $0.05 rise in the dollar/pound exchange rate. If the pound futures contract on the Chicago Mercantile Exchange calls for delivery of 62,500 pounds, how many contacts will you need to enter to hedge? Will you take the long or the short side of the contracts?

64 contracts short

64 contracts long

32 contracts short

32 contracts long

2. You know that many corporate bonds are issued with call provisions that allow the issuer to buy bonds back from the bondholders at some time in the future at a specified call price. Which of the following is correct?

a) This is similar to the bond issuer holding a call option with an exercise price equal to the price at which the bond can be repurchased.

b) This is similar to the bondholder owning a call option with an exercise price equal to the price at which the bond can be repurchased.

c) This is similar to the bond issuer holding a put option with an exercise price equal to the price at which the bond can be repurchased.

d) This is similar to the bondholder owning a put option with an exercise price equal to the price at which the bond can be repurchased.

Reference no: EM131844712

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