Chapter 3 Hedging Strategies Using Futures

15) Which of the following does NOT describe beta?

A) A measure of the sensitivity of the return on an asset to the return on an index

B) The slope of the best fit line when the return on an asset is regressed against the return on the market

C) The hedge ratio necessary to remove market risk from a portfolio

D) Measures correlation between futures prices and spot prices

16) Which of the following is true?

A) Hedging can always be done more easily by a company's shareholders than by the company itself

B) If all companies in an industry hedge, a company in the industry can sometimes reduce its risk by choosing not to hedge

C) If all companies in an industry do not hedge, a company in the industry can reduce its risk by hedging

D) If all companies in an industry do not hedge, a company is liable increase its risk by hedging

17) Which of the following is necessary for tailing a hedge?

A) Comparing the size in units of the position being hedged with the size in units of the futures contract

B) Comparing the value of the position being hedged with the value of one futures contract

C) Comparing the futures price of the asset being hedged to its forward price

D) None of the above

18) Which of the following is true?

A) Gold producers should always hedge the price they will receive for their production of gold over the next three years

B) Gold producers should always hedge the price they will receive for their production of gold over the next one year

C) The hedging strategies of a gold producer should depend on whether it shareholders want exposure to the price of gold

D) Gold producers can hedge by buying gold in the forward market

19) A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true?

A) It is liable to experience liquidity problems if the price of silver falls dramatically

B) It is liable to experience liquidity problems if the price of silver rises dramatically

C) It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically

D) The operation of futures markets protects it from liquidity problems

20) A company will buy 1000 units of a certain commodity in one year. It decides to hedge 80% of its exposure using futures contracts. Spot price and futures price are currently $100 and $90. The one year futures price of the commodity is $90. If the spot price and the futures price in one year turn out to be $112 and $110 respectively, what is the average price paid for the commodity?

A) $92

B) $96

C) $102

D) $106