Baran

 

AIM 12: Define and compute a commodity spread.

 

1、A hedge fund specializing in commodity related derivatives is considering a crush spread position using soybean and soybean oil futures contracts. Using the information in the table below, determine which of the following statements is correct.

< >>	Soybeans	Soybean Oil
Spot Price	$5.83/bushel	$0.27/pound
Storage Cost*	0.63/bushel	0.03/pound
Convenience Yield*	6%	6%
Interest rate*	11%	11%
Time to expiration	3 months	6 months

*Continuously compounded annual rates

A) The hedge fund should establish a long position in the soybean futures contract for no more than $6.91 and a short position in the soybean oil contract for no less than $0.29.

B) The hedge fund should establish a short position in the soybean futures contract for no less than $7.01 and a long position in the soybean oil contract for no less than $0.28.

C) The hedge fund should establish a long position in the soybean futures contract for no more than $7.01 and a long position in the soybean oil contract for no more than $0.29.

D) The hedge fund should establish a long position in the soybean futures contract for no more than $7.01 and a short position in the soybean oil contract for no less than $0.28.

Baran

 

The correct answer is D

 

When a convenience yield is associated with a commodity, the futures price on that commodity becomes a range, rather than a single value.  The range is expressed in the following formula:


Using this formula, we can calculate the range of futures prices acceptable for the soybean and soybean oil futures contracts as follows::

 

For a crush spread, the investor goes long (short) a soybean futures contract and then takes a short (long) position in a soybean meal futures contract.fficeffice" />

 

Baran

 

2、Which of the following results from a commodity that is an input in the production process of other commodities?

A) Implied lease rate. 

B) Commodity spread.

C) Implied forward rate.

D) Convenience yield.

Baran

 

 The correct answer is B

A commodity spread results from a commodity that is an input in the production process of other commodities.

Baran

 

AIM 14: Evaluate the differences between a strip hedge and a stack hedge and analyze how these differences impact risk management.

1、How could an oil refiner hedge the risk of an agreement to supply 50,000 barrels of oil each month for a year at a fixed price? The oil refiner could enter a:

      I. long futures contract position for every month for 50,000 barrels.

     II. short futures contract position for every month for 50,000 barrels.

    III. long near-term futures contract for 600,000 barrels.

    IV. short near-term futures contract for 50,000 barrels.

A) I only.

B) I and III only.

C) II only.

D) II and IV only.

Baran

 

The correct answer is B

 

The oil refiner could enter into a strip hedge, by obtaining a long futures contract position for every month of the year for 50,000 barrels. Alternatively, the oil refiner could create a long position of a near-term futures contract for approximately 600,000 barrels.

Baran

 

2、Which of the following statements regarding controlling risk with derivatives is FALSE?

A) In a strip hedge, the portfolio manager buys more of the nearest-term futures contract than the amount the manager is hedging.

B) To reduce the duration of a current portfolio to a target duration, a portfolio manager can sell T-bond futures contracts.

C) To calculate the dollar duration of a portfolio, the manager multiplies the effective duration times the basis point movement times the value of the position.

D) Credit spread risk refers to the risk that the difference between the yield on a risky asset and the yield on a risk-free asset increases.

Baran

 

 The correct answer is A

In a stack hedge, the portfolio manager buys more of the nearest-term futures contract than the amount the manager is hedging.

Baran

 

3、Which of the following is a difference between a strip and a stack hedge? A stack hedge uses:

A) out-of-the money put options.

B) a combination of long and short positions in different futures expirations.

C) futures contracts that are concentrated in a single futures expiration.

D) futures contracts on assets that are related to, but different, from the hedged asset.

Baran

 

 The correct answer is C