Jaleel knows that the primary purpose of a futures contract is the management ofrisk exposures. Use Qantas Airlines as an example to further explain how a futurescontract achieves this risk management function.
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Jaleel knows that the primary purpose of a futures contract is the management ofrisk exposures. Use Qantas Airlines as an example to further explain how a futurescontract achieves this risk management function.
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- A hedger buys a futures contract, taking a long position in the wheat futures market. What are the hedger's obligations under this contract? Describe the risk that is hedged in this transaction, and give an example of someone who might enter into such an arrangement.Which of the following is a reason why the default risk of a futures contract is assumed to be less than that of a forward contract? a. Forward contracts can be tailored, while future contracts are non-standardized. b. Forward contracts are classified as exotic derivatives. c. Futures contracts are exchange-traded contracts, daily settlements are implemented by the clearing house. d. More flexibility as the buyer can decide whether or not to exercise the contract at maturity. e. For futures contracts, all cash flows are required to be paid at one time on contract maturity.What is a futures contract, and how are futuresused to manage risk? What are you protectingagainst if you buy Treasury futures contracts? Whatif you sell Treasury futures short?
- Discuss the advantages and disadvantages of using options to hedge as compared to using futures contracts.Identify the fundamental distinction between a futures contract and an option contract, and briefly explain the difference in the manner that futures and options modify portfolio risk.The fact that the clearinghouse is the counterparty to every futures contract issued is important because it eliminates _________ risk. A. Market B. Basis C. Interest rate D. Credit
- Suppose a company knows the quantity of a commodity that it willproduce. Describe how it might hedge using a futures contract.Basis risk refers to the risk: a. associated with unanticipated price movements on the underlying asset. b. of default on the futures contract. c. associated with anticipated price movements in the cash market. d. from a change in the spread between the price on the commodity or financial security in the physical market and the price of the related futures contract.(a) Outline in detail what is meant by a forward and futures contract. Evaluate the relationship between futures price and spot price, and give reasons to justify the necessity for exchange margin accounts. (b) Explain the concept of cost of carry model and its role in the pricing of financial futures contracts.
- Critically discuss the use of forwards vs. futures instruments within firms and how these can be used in order to mitigate financial risks. Provide examples to support your answers.Consider a firm in the DC that uses inputs from a supplier in the FC. To hedge the FX risk the FC firm could (select all that are true): A.Purchase a futures contract for DC to FC below your expected future trajectory of the FX rate and that the supply cotract is written in the DC B.Purchase a call option for FC to DC, which the firm will exercise if the spot FX rate (FC/DC) at the time is higher than the contract rate and the supply contract is written in the DC. C.Purchase a futures contract for FC to DC that you could sell for a profit if the DC weakens, which increases your costs of exporting the input D.Engage in a forward contract for DC to FC at today's spot rate, given that counter-party risk is managable and that the supply contract can be written in the DC. E.Exercise a futures contract for DC to FC if the strike price of the contract (FC/DC) is higher than the spot market rate at that time and that the supply contrtact can be written in the DC. F.Purchase a call option…Explain why futures contracts may mitigate the credit risk involved in forward contracts.