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P1.T3.406. Hedging strategies

Nicole Seaman

Director of FRM Operations
Staff member
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406.1. Starbuckaroos is a coffee producer who is committed to the purchase of one million (1,000,000) pounds of coffee in November. The company will hedge this planned purchase with Coffee future contracts; each contract is for the delivery of 37,500 pounds. The daily standard deviation (volatility) of the spot price of coffee is three cents ($0.03) while the daily standard deviation of the coffee futures contract is four cents ($0.04). The correlation between the futures price change and the spot price change is 0.70. Which is nearest to Starbuckaroos desired hedge transaction?

a. Short 7.0 coffee futures contracts
b. Long 7.0 coffee futures contracts
c. Long 14.0 coffee futures contracts
d. Long 28.0 coffee futures contracts

406.2. A Portfolio Manager has a $50.0 million portfolio with a beta of 1.360. The manager wants to reduce the net beta of the portfolio to 1.00 by employing futures contracts on the S&P 500. The index futures contract currently trades at 1990; as usual, each contract is for delivery of $250 times the index. Which is nearest to the manager's desired trade?

a. Short 7 S&P 500 futures contracts
b. Short 36 S&P 500 futures contracts
c. Short 94 S&P 500 futures contracts
d. Long 23 S&P 500 futures contracts

406.3. It is June and you manage a long bond portfolio with a value of $20.0 million. You expect the duration of the portfolio will be 6.90 years in December, six months from today. You want to hedge against an increase in interest rates by employing U.S. Treasure bond futures contracts. The December Treasury bond futures price is currently 137-28 (aka, 137'28) and you expect the cheapest-to-deliver bond will have a duration of 5.70 years in December. Which is nearest to the hedge trade?

a. Short 176 US Treasury bond futures contracts
b. Short 103 US Treasury bond futures contracts
c. Short 45 US Treasury bond futures contracts
d. Long 128 US Treasury bond futures contracts

Answers here:

Nicole Seaman

Director of FRM Operations
Staff member
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