Hedging Flashcards
1
Q
Why is the hedge not perfect
A
Due to rounded contract sizes
and basis risk the futures prices will not be perfectly aligned with I/R spot rate on a particular day
2
Q
Ad/dis Forwards
A
Ads
Specifically tailored
Dis
No secondary markey should customer/ supplier default
3
Q
Ad/ dis Futures
A
Dis
Not tailored/ stndrd number of contracts
Requires a intial margin to be paid when the futures are bought/sold (cover losses from first day of trading)Marking to market
basis risk
Ads
Secondary market
4
Q
Ads/ dis
A
No secondary market
Premium.
5
Q
What to look for when comparing futures and forwards
A
If future only offers slightly better outcome choose forward as no initial margin requird
