Reading 36: Commodity Forwards and Futures－LOS c basis, contrast

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CFA Institute Area 8-11, 13: Asset Valuation
Session 11: Alternative Investments for Portfolio Management
Reading 36: Commodity Forwards and Futures
LOS c: Compare and contrast the basis risk of commodity futures with that of financial futures.

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 order to minimize basis risk, it is ideal to find a futures contract:

A) that is highly correlated with the price of the hedged asset.

B) that is uncorrelated with the price of the hedged asset.

C) whose maturity does not match the expiration of the hedge.

D) that is highly correlated with the size of the hedged asset.

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Answer and Explanation

In order to minimize basis risk, it is ideal to find a futures contract that is highly correlated with the price of the hedged asset.

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Basis risk will arise in both commodity and financial futures due to:

A) timing.

B) storage costs.

C) grade.

D) transportation costs.

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Answer and Explanation

Basis risk will arise in both commodity and financial futures due to timing. Basis risk arising from storage costs, grade, and/or transportation costs is exclusive to commodity futures.

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Commodity futures may tend to have more basis risk than financial futures because:

A) there can be more than one risk-free rate.

B) of timing.

C) commodity futures contracts can have different geographical points of delivery.

D) the commodity contracts are more liquid.

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Answer and Explanation

Imperfect hedges cause basis risk in commodity futures. For commodities, this can be caused by hedging an oil contract with delivery on the East Coast with a NYMEX oil contract that calls for delivery in the South. Such geographic considerations are less important for financial futures.

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One common source of basis risk shared by commodity futures and financial futures is:

A) transportation costs.

B) storage costs.

C) the difference in the timing of the transaction and the maturity of the contract.

D) nothing, because they share no common sources of basis risk.

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Answer and Explanation

All futures contracts can have basis risk because of differences in the timing of the transaction being hedged and the maturity of the contract. Transportation costs and storage costs are a factor with commodity futures but not with financial futures.

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Hedging a transaction to take place in five years with one-year futures contracts would produce basis risk in:

A) commodity futures but not financial futures.

B) both commodity futures and financial futures.

C) financial futures but not commodity futures.

D) neither commodity futures nor financial futures.

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Answer and Explanation

In order to minimize basis risk, it is ideal to find a futures contract that is highly correlated with the price of the hedged asset. In addition, the timing of the delivery should match the expiration of the hedge in both financial and commodity futures. Basis risk can result in both commodity futures and financial futures from an imperfect hedge caused by a desired distant delivery but hedged with near term contracts.
  

[此贴子已经被作者于2008-9-18 17:05:45编辑过]

rc2008

A

1212jo

感谢楼主！

deqiang

thanks.