Hedging - Answers

  1. False. Although this is a hedge, it is not anticipatory. He already has a position.
  2. B. The basis is $1 under November rather than $2 under, so it is strong in historical terms.
  3. C. The others are false.
  4. B. The others are false.
  5. B.
  6. C. Basis describes the relationship between cash and futures prices. Margin is earnest money that a trader must put forth when entering a trade and has no impact on basis. All of the other items do.
  7. A. In a long hedge, the trader may need to lock in a favorable price for an item that he or she does not yet have in order to deliver a good to a client. Think of the miller who needs a good price on flour to be able to produce bread that he is to sell to customers.
  8. C. In a normal (contango) market, futures prices exceed cash prices.
  9. B. Due to the dynamic nature of basis where cash and futures prices move in the same direction, but not by the same amount, a hedge will not completely eliminate risk.
  10. A. Agricultural commodity contracts offer delivery of the good, but stock index futures must be cash settled as one cannot delivery an index.
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