Fin 4319-Record C3

Question 1

for futures, when you are long do you want the future to go up or down?

Answer 1

up

Question 2

for futures, when you are short do you want the future to go up or down?

Answer 2

down

Question 3

what are 2 types of cattle futures?

Answer 3

feeder cattle (1 year old cattle), and live cattle futures

Question 4

if a person has spot cattle, are they long or short?

Answer 4

long because they own real cows and want to sell them at a high price

Question 5

how do they hedge the spot cattle?

Answer 5

they short cattle futures market.

Question 6

if you are long spot cattle and hedge live cattle futures, and spot prices go up, do you make money money?

Answer 6

no, you make more money on long spot cattle but lose money on live cattle futures so it’s even.

Question 7

if you need to feed cattle with corn, are you long or short corn?

Answer 7

short corn because you need to buy it and you benefit when it’s lower price

Question 8

how to hedge corn price in case corn prices rise?

Answer 8

buy corn futures so if corn prices rise, you make money

Question 9

as a producer of cattle, if you don’t hedge your cattle, are you speculating?

Answer 9

yes, you are speculating that prices of cattle will go up

Question 10

where do individual farmers sell their grains?

Answer 10

they sell to grain elevator for fixed future price and give them all of their grain when it’s ready. the grain elevator will sell it to big companies for a profit and also hedge their position in the grain futures market

Question 11

what is managerial risk?

Answer 11

when the futures manager speculates instead of hedging

Question 12

Valero, a oil refinery, which buys crude oil to produce and sell gasoline, Is valero long or short crude futures?

Answer 12

they want to buy crude oil so they want price to be lower, to hedge the price they need to go long

Question 13

Valero, a oil refinery, which buys crude oil to produce and sell gasoline, Is valero long or short spot gasoline?

Answer 13

they want to sell gasoline so they want price to be higher, to hedge the price they need to go short

Question 14

what is a short crack spread?

Answer 14

it’s a regular trade where they long crude oil futures and short gasoline

Question 15

what happens if crack spread narrows?

Answer 15

the oil refining margin goes down, widens margin goes up.. you protect spread getting to narrow.

Question 16

what is the spark spread?

Answer 16

electric companies long natural gas and short electricity

Question 17

what is the crap spread?

Answer 17

long corn, short cattle

Question 18

Suppose a bond dealer wants to hedge its inventory of
Treasury bonds over the weekend. The dealer is holding $15 million worth of T-bonds with a
modified duration of 12 years. The futures contract, currently priced at 133, has a modified duration
of 15 years. Compute the number of contracts required to hedge the position, indicate whether you
would go long or short, and explain how the hedge works.

Answer 18

.