Reference no: EM132623342

You enter into a short Eurodollar futures contract at a price of 99.65 and close it out a week later at a price of 99.50. You have gained $150 on the position.

A portfolio manager who fully removes the systematic risk of a stock portfolio by selling futures contracts on a stock index, could achieve the same outcome by selling the shares and replacing the share portfolio with a risk-free bond portfolio.

Firm XYZ plans to borrow $10 million for 3 months beginning in June. They can achieve a perfect hedge of their borrowing rate by buying FRA.

The physical market price of premium olive oil is $30 per liter. A futures contract on 100,000 liters with settlement in 1 year is currently priced at $33.20 per liter. The one-year interest rate is 7% p.a. (continuously compounded) and it costs $0.50 per liter per year (payable at the beginning of each year) to store olive oil. You can make riskless arbitrage profit of $48,885 (to the nearest dollar) by buying 100,000 liters of physical olive oil, storing it and selling one futures contract.

In the context of hedging using futures, "basis" risk may arise in a hedging situation if the futures contract used for hedging relates to a commodity that is different from that being hedged.