Reference no: EM131476875
Q1. It is now June. A company knows that It will sell 5000 barrels of crude oil in September. It uses the October CME Group futures contract to hedge the price it will receive. Each contract is on 1,000 barrels of "light sweet crude". What position should it take? What price risk is it still exposed to after taking the position?
Q2. Sixty futures contracts are used to hedge an exposure to the price of silver. Each futures contract is on 5000 ounces of silver. At the time the hedge is closed out, the basis is $0.20 per ounce. What is the effect of the basis on the hedger's financial position if (a) the trader is hedging the purchase of silver and (b) the trader is hedging the sale of silver?
Q3. A trader owns 55,000 units of a particular asset and decides to hedge the value of her position with futures contracts on another related asset. Each futures contract is on 5,000 units. The spot price of the asset that is owned is $28 and the standard deviation of the change in this price over the life of the hedge is estimated to be $0.43. The futures price of the related asset is $27 and the standard deviation of the change in this over the life of the hedge is $0.40. The coefficient of correlation between the spot price change and futures price change is 0.95.
a) What is the minimum variance hedge ratio?
b) Should the hedger take a long or short futures position?
c) What is the optimal number of futures contracts with no tailing of the hedge?
d) What is the optimal number of futures contract with tailing of the hedge?
Q4. A company wishes to hedge its exposure to a new fuel whose price changes have a 0.6 correlation with gasoline futures price changes. The company will lose $1 million for each 1 cent increase in the price per gallon of the new fuel over the next three months. The new fuel's price changes have a standard deviation that is 50% greater than price changes in gasoline futures prices. If gasoline futures are used to hedge the exposure, what should the hedge ratio be? What is the company' exposure measured in gallons of the new fuel? What position, measured in gallons, should the company take in gasoline futures? How many gasoline future contracts should be traded? Each futures contract is on 42000 gallons.
Q5. The following table gives data on monthly changes in the spot price of a commodity and the futures price of a contract used to hedge it. Use the data to calculate a minimum variance hedge ratio.
|
Spot price change
|
+0.50
|
+0.61
|
-0.22
|
-0.35
|
+0.79
|
|
Future price change
|
+0.56
|
+0.63
|
-0.12
|
-0.44
|
+0.60
|
|
Spot price change
|
+0.04
|
+0.15
|
+0.70
|
-0.51
|
-0.41
|
|
Futures price change
|
-0.06
|
+0.01
|
+0.80
|
-0.56
|
-0.46
|
Q6. A fund manager has a portfolio worth $50 million with a beta of 0.87. The manager is concerned about the performance of the market over the next two months and plans to use three-month futures contracts on the S&P 500 to hedge the risk. The current index level is 1,250, one contract is on 250 times the index, the risk free rate is 6% per annum, and the dividend yield on the index is 3% per annum. The current three-month futures price is 1,259.
a) What position should the fund manager take to hedge exposure to the market over the next two months?
b) Calculate the effect of your strategy on the fund manager's returns if the index in two months is 1000, 1100, 1200, 1300 and 1400. Assume that the one month futures price is 0.25% higher than the index level at this time.
Attachment:- Assignment Files.rar