S3 7.3 Flashcards
How to calculate BASIS?
Cash - Futures = Basis
Which is usually higher, Cash or Futures price?
Futures usually higher, so Basis tends to be Negative
What happens to the Basis if the Futures (Mkt) price increases?
The Basis gets more negative –> It Weakens (or Widened)
What happens to the Basis if the Futures (Mkt) price decreases?
The Basis gets less negative –> It Strengthens (or Narrows)
What is my expectation, in terms of Basis, if I go long futures to hedge?
1) Futures price increases –>
2) Cash - larger number = more negative –>
3) Basis weakens
What is my expectation, in terms of Basis, if I go short futures to hedge?
1) Futures price decreases –>
2) Cash - smaller number = less negative –>
3) Basis strengthens
Another term for Negative Basis?
Basis is UNDER
Do Futures abd Cash prices move in the same direction and the same amount?
1) Same direction - YES
2) Same amount - NO
What is a Perfect Hedge?
When there’s no change in the Basis in the life of the Hedge (Highly unusual)
How is a Profit or Loss produced in terms of the Basis?
A change in the Basis = Profit / Loss
What are other terms for OPening and cliosing a hedge position?
Establishing and lifting
What is Basis Risk?
Unexpected widening or narrowing of the Basis between establishing and lifting hedge position
What does thre fact that the Basis changes?
Implies there will be G/L based on how the Basis fluctuates (no perfect hedge = no full protection against price variations)
What happens to Futures and Cash Prices as contracts come to maturity?
Cash and Futures Prices converge = Basis will approach zero (due to investors buying lower and selling higher)
What makes a hedger roll a contract?
Delayed harvest
What does it mean to Cross Hedge?
When contracts to hedge a specific commodity are not available (don’t exist), we buy/sell a existing and similar commodity - i.e. soybean oil instead of cottonseed oil
EFP
Exchange for Physicals = Exchange of Futures for Cash position
Can we do an EFP outside exchange floor?
NOPE
Is it OK for hedger to be Over-Hedged?
Hedger wants to either be:
1) Perfectly hedged, or
2) Under hedged
Else will be coinsidered a Speculator and be held to stringier margin requirements
Number of futures contracts Vs Underlying face value of Finacial instruments being hedged
They are Different, so Weighting is necessary
Weighting is used to adjust for differences in?
1) Cash and futures instruments used
2) Coupon rates between cah and futures instruments
3) Maturities between cash and futures instruments
What is the relationship between bonds prices and interest rates?
Inverse
Do we hedge the change in interest rate?
Never
Do we hedge the price movement resulting from the change in interest rate?
YES
1) Interest (Yields) Up = Prices down –> Short hedge
2) Interest (Yields Down) = Prices up –> Long hedge
Do US Dollar Futures exist?
NOPE
How do we hedge US Dola
In Foreign currency
