Question

1. Hedging risk for a long position is accomplished by

A. taking another long position.

B. taking a short position.

C. Taking additional long and short positions in equal amounts.

D. taking a neutral position.

2. A disadvantage of a forward contract is that

A.it may be difficult to locate a counterparty.

B. the forward market suffers from lack of liquidity.

C. these contracts have default risk.

D. all of the above.

3. By selling short a futures contract of $100,000 at a price of 115 you are agreeing to deliver

A.$100,000 face value securities for $115,000.

B.$115,000 face value securities for $110,000.

C.$100,000 face value securities for $100,000.

D.$115,000 face value securities for $115,000.

4. When a financial institution hedges the interest-rate risk for a specific asset, the hedge is called a

A. macro hedge.

B. micro hedge.

C. cross hedge.

D. futures hedge.

Answer 1

1. Answer B

Since long position will be square off by short position

while another long position will increase the risk and taking both long and short position will not affect current risk of long position.

2. Answer D

Since forward contract has lack of liquidity, has counter party risk as well as default risk.

3.Answer A

Since short denote agree to sale at future date at agreed price i.e. 115 It means agreed to sell securities at $115000 which has face value of $100000

4. Answer B

Micro hedge, hedging the risk of interest rate risk of specific asset while macro hedges target assets and categories of asset and cross hedge  two distinct assets with positive correlation.