Derivatives【 Reading 36】习题精选 equals, 2012, equity, contract

andytrader

If the value of a stock portfolio equals 16 times the futures price of the appropriate equity index contract and beta of the equity portfolio and futures price were equal, how many contracts would it take to reduce the beta of the equity index to zero?

A) A short position in 16 contracts.

B) A long position in 4 contracts.

C) A long position in 16 contracts.

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Number of contracts = -16 = (0 − beta) × (16 × futures price) / (beta × futures price)

clearlycanadian

When investing in foreign equity assets, the exchange-rate dimension of the investment generally:

A) increases the total risk.

B) diversifies the position and thus lowers risk.

C) can be completely hedged.

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The exchange-rate dimension generally adds risk. The two hedging strategies utilized by global portfolio managers to manage the risk of a foreign-denominated portfolio involve selling forward contracts on the foreign market index (to manage market risk) and selling forward contracts on the foreign currency (to manage the currency risk). They can choose to hedge one or the other, both, or neither.

clearlycanadian

In order to perfectly hedge an investment in foreign equities, a manager would most likely have to use:

A) currency forwards only.

B) both currency forwards and equity futures.

C) both currency futures and equity forwards.

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Forwards are most often used for currency risk and futures are most often used for equity risk. The manager would have to use both contracts to completely hedge all the risk.

clearlycanadian

When hedging the exchange-rate risk of a foreign currency-denominated equity portfolio, a manager must recognize that the position has:

A) exchange-rate risk only.

B) equity risk only.

C) both equity risk and foreign exchange risk.

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The position will have both equity and foreign exchange risk. This makes the position, in isolation, more risky than a domestic equity portfolio.

clearlycanadian

If a manager shorts a forward currency contract to hedge the expected value of a foreign-equity portfolio in one year. The worst-case scenario is if the portfolio’s return is:

A) less than the expected value and the currency appreciates.

B) less than the expected value and the currency depreciates.

C) greater than the expected value and the currency appreciates.

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This should be obvious because a decline in the equity position is bad and the short position in a forward currency contract hurts when the foreign currency appreciates. If the equity position falls short of the contracted amount, in addition to the loss from the decline in asset prices, then the manager will suffer a loss equal to the difference in the hedged amount and the actual equity value times the difference in the spot and contracted forward rate.

clearlycanadian

If a manager plans to use currency forwards to hedge a long position in foreign equities, then which of the following would represent a strategy that would prevent over-hedging?

A) Short an amount that is less than the current equity position.

B) Short an amount that is more than the current equity position.

C) Go long an amount that is more than the current equity position.

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The manager would want to short the forward contracts to hedge depreciation of the foreign currency. To prevent hedging too much, over-hedging, the manager would hedge an amount less than the equity position because that position may decline in value from the equity risk.

clearlycanadian

An asset manager says he has perfectly hedged an equity portfolio that is denominated in a foreign currency by only using forward currency contracts. We know then that the:

A) number of contracts used is equal to that used on a comparable equity position.

B) asset manager is not telling the truth.

C) number of contracts used is greater than that used on a comparable equity position.

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Since the asset manager cannot know the future value of the equity position, it is impossible to perfectly hedge the position with only currency contracts.

clearlycanadian

When expecting to make a future payment in a foreign currency, a firm should take a:

A) short forward position in the currency to hedge an appreciation of that currency.

B) long forward position in the currency to hedge a depreciation of that currency.

C) long forward position in the currency to hedge an appreciation of that currency.

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Expecting to make a payment is like being short the currency. The firm would want to take a long forward position. If the currency appreciates and there is no hedge, the firm would pay more. With the hedge, the overall cost in domestic currency is locked in (cost increases will be offset by gains on the forward contract). Of course, the forward contract will result in a loss if the foreign currency actually depreciates, but this will be offset by a decrease in the cost of the underlying transaction.

clearlycanadian

A maker of large computers has just received an order for some of its products. The agreed upon price is in British pounds: ₤8 million. The firm will receive the pounds in 60 days. The current exchange rate is $1.32/₤ and the 60-day forward rate is $1.35/₤. If the firm uses the forward contract to hedge the corresponding exchange rate risk, how many dollars will it expect to receive?

A) $10,560,000.

B) $5,925,926.

C) $10,800,000.

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On the day the order comes in, the firm effectively has a long position in pounds; therefore, it should take a short position in a forward contract. This contract would obligate the firm to deliver the pounds that it will receive for dollars. The contract would be to exchange ₤8 million for:

$10,800,000 = (₤8,000,000) × $1.35/₤.

clearlycanadian

With respect to the practice of using forward contracts to eliminate the exchange-rate risk associated with a receiving a future payment in a foreign currency, which of the following is correct? A firm that expects to receive a foreign-currency payment is:

A) “short” the currency and should go long the forward contract on the foreign currency.

B) “short” the currency and should short the forward contract on the foreign currency.

C) “long” the currency and should short the forward contract on the foreign currency.

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In hedging foreign exchange risk, anticipating a receipt (payment) of a currency is like being long (short) the currency. To hedge the associated risk, a manager should take the opposite position in the forward contract.