Hedging - Answers
- False. Although this is a hedge, it is not anticipatory. He already has a position.
- B. The basis is $1 under November rather than $2 under, so it is strong in historical terms.
- C. The others are false.
- B. The others are false.
- 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.
- 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.
- C. In a normal (contango) market, futures prices exceed cash prices.
- 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.
- A. Agricultural commodity contracts offer delivery of the good, but stock index futures must be cash settled as one cannot delivery an index.