S3 7.3

Question 1

How to calculate BASIS?

Answer 1

Cash - Futures = Basis

Question 2

Which is usually higher, Cash or Futures price?

Answer 2

Futures usually higher, so Basis tends to be Negative

Question 3

What happens to the Basis if the Futures (Mkt) price increases?

Answer 3

The Basis gets more negative –> It Weakens (or Widened)

Question 4

What happens to the Basis if the Futures (Mkt) price decreases?

Answer 4

The Basis gets less negative –> It Strengthens (or Narrows)

Question 5

What is my expectation, in terms of Basis, if I go long futures to hedge?

Answer 5

1) Futures price increases –>
2) Cash - larger number = more negative –>
3) Basis weakens

Question 6

What is my expectation, in terms of Basis, if I go short futures to hedge?

Answer 6

1) Futures price decreases –>
2) Cash - smaller number = less negative –>
3) Basis strengthens

Question 7

Another term for Negative Basis?

Answer 7

Basis is UNDER

Question 8

Do Futures abd Cash prices move in the same direction and the same amount?

Answer 8

1) Same direction - YES

2) Same amount - NO

Question 9

What is a Perfect Hedge?

Answer 9

When there’s no change in the Basis in the life of the Hedge (Highly unusual)

Question 10

How is a Profit or Loss produced in terms of the Basis?

Answer 10

A change in the Basis = Profit / Loss

Question 11

What are other terms for OPening and cliosing a hedge position?

Answer 11

Establishing and lifting

Question 12

What is Basis Risk?

Answer 12

Unexpected widening or narrowing of the Basis between establishing and lifting hedge position

Question 13

What does thre fact that the Basis changes?

Answer 13

Implies there will be G/L based on how the Basis fluctuates (no perfect hedge = no full protection against price variations)

Question 14

What happens to Futures and Cash Prices as contracts come to maturity?

Answer 14

Cash and Futures Prices converge = Basis will approach zero (due to investors buying lower and selling higher)

Question 15

What makes a hedger roll a contract?

Answer 15

Delayed harvest

Question 16

What does it mean to Cross Hedge?

Answer 16

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

Question 17

EFP

Answer 17

Exchange for Physicals = Exchange of Futures for Cash position

Question 18

Can we do an EFP outside exchange floor?

Answer 18

NOPE

Question 19

Is it OK for hedger to be Over-Hedged?

Answer 19

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

Question 20

Number of futures contracts Vs Underlying face value of Finacial instruments being hedged

Answer 20

They are Different, so Weighting is necessary

Question 21

Weighting is used to adjust for differences in?

Answer 21

1) Cash and futures instruments used
2) Coupon rates between cah and futures instruments
3) Maturities between cash and futures instruments

Question 22

What is the relationship between bonds prices and interest rates?

Answer 22

Inverse

Question 23

Do we hedge the change in interest rate?

Answer 23

Never

Question 24

Do we hedge the price movement resulting from the change in interest rate?

Answer 24

YES

1) Interest (Yields) Up = Prices down –> Short hedge
2) Interest (Yields Down) = Prices up –> Long hedge

Question 25

Do US Dollar Futures exist?

Answer 25

NOPE

Question 26

How do we hedge US Dola

Answer 26

In Foreign currency