Question

Please Answer the questions below with Ture or False:

1. If the target beta exceeds the underlying’s beta, then the manager will go long the futures contract.​

2.Based on the price sensitivity hedge ratio, if the modified duration of the futures contract increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive.​

3.The price sensitivity hedge ratio uses the durations of the spot and futures positions.​

4.A hedge that involves the use of a futures contract on an instrument that is different from the instrument being hedged is called a cross hedge.​

Answer 1

1. If the target beta exceeds the underlying’s beta, then the manager will go long the futures contract - False, If the Target beta exceeds the underlying beta, the risk got increased & then the manager will go Short the futures contract.

2. Based on the price sensitivity hedge ratio, if the modified duration of the futures contract increases (assumed to be positive), then the optimal number of futures contracts increases. Assume the durations are positive - True

3.The price sensitivity hedge ratio uses the durations of the spot and futures positions - True

4.A hedge that involves the use of a futures contract on an instrument that is different from the instrument being hedged is called a cross hedge - True

The investor takes opposing positions in each investment in an attempt to reduce the risk of holding just one of the securities.