Practice Question Set: Using Futures for Hedging

Topic Progress:

Chapter 8. Using Futures for Hedging Practice Question set contains 31pages covering the following learning objectives:

* Define and differentiate between short and long hedges and identify their appropriate uses.

* Describe the arguments for and against hedging and the potential impact of hedging on firm profitability.

* Define the basis and explain the various sources of basis risk, and explain how basis risks arise when hedging with futures.

* Define cross hedging, and compute and interpret the minimum variance hedge ratio and hedge effectiveness.

* Compute the optimal number of futures contracts needed to hedge an exposure, and explain and calculate the “tailing the hedge” adjustment.

* Explain how to use stock index futures contracts to change a stock portfolio’s beta.

* Explain how to create a long-term hedge using a “stack and roll” strategy and describe some of the risks that arise from this strategy.

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