stack-and-roll hedge

itsyourz

New Member
Hi!

question number 33 in practice exam 08 part I

i dont know the terms like front month, front end, short end, front-loaded something like those

because of my poor english.

could you explain about those things??

otherwise i can not even understand its solution

cheers

suk
 

David Harper CFA FRM

David Harper CFA FRM
Subscriber
Hi suk,

This has not been covered, you cannot be expected to know this question and the terms. No assignments covered this.

Calendar basis risk is same basis risk per Hull (that gain on hedge will not match loss underlying due to differences between the hedge instrument and the underlying) except of a particular sort: differences due to time. The Metallgesellschaft mistmatch between (long positions in) short-term futures and (short positions in) long term forwards is a calendar basis risk (long-term hedged by short-term instruments).

So it is manifest in abrubt changes in the forward curve. In MG, they were long "front" months (contracts nearer to expiration) and "short" back-month (contracts with maturities further away). Such strategy hurts in shift to contango.

Culp does say that the oil forward curve is relatively stable in at the long end (back month contracts) and volatile at the short end of the forward (front month contracts). Hence the notion that front month STACKS have more basis risk.

David
 
Top