FMP

mayankmundhra30
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Joined: Sat Jun 25, 2016 8:13 am

FMP

Postby mayankmundhra30 » Mon Aug 22, 2016 10:17 am

Red Inc. uses glass for manufacturing of LCD screens. Red wants to hedge its exposure to glass price shocks over next 6 months. Futures contracts are not readily available for glass. Red finds out two commodities whose prices are closely correlated with two commodities viz. Commodity X and Commodity Y. Futures on Commodity X have a correlation of 0.79 and that of Commodity Y have a correlation of 0.91 with price of glass. Futures on both Commodity X and Y are available with 4 month and 8 month expiration. Which contract would be the best to minimize basis risk considering information provided

a. Futures on Commodity X with 4 months to expiration Incorrect
b. Futures on Commodity Y with 4 months to expiration Incorrect
c. Futures on Commodity X with 8 months to expiration Incorrect
d. Futures on Commodity Y with 8 months to expiration Correct

How to do it? kindly reply

2) Lee has portfolio of $ 15 million which is invested in mid cap high beta stocks. His portfolio beta is 1.5 relative to S&P midcap index. The S&P midcap index futures are trading at $1200 with a multiplier of 300. Lee expects market to be volatile for next six months and hence would want to hedge his exposure to market risk using S&P midcap index futures. He executes a short index futures strategy. The next day S&P 500 spot price is $1100 and futures price is $1250. Lee follows tailing the hedge strategy. How many futures contract Lee should trade the next day for following tailing the hedge strategy?
Choose one answer.
a. Lee should go long 7.5 S&P midcap index futures contracts with the same maturity Correct
b. Lee should go short 1.5 S&P midcap index futures contracts with the same maturity Incorrect
c. Lee should go long 1.5 S&P midcap index futures contracts with the same maturity Incorrect
d. Lee should go short 7.5 S&P midcap index futures contracts with the same maturity Incorrect
I request you to reply at the earliest.

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