FIN2601 Assignment 1 (QUIZ ANSWERS & CALCULATIONS) Semester 1 2024 - DUE 10 April

FIN2601 Assignment 1 (QUIZ ANSWERS & CALCULATIONS) Semester 1 2024 - DUE 10 April Which of the following increases basis risk? - ANS-A large difference between the futures prices when the hedge is put in place and when it is closed out *Dissimilarity between the underlying asset of the futures contract and the hedger's exposure* A reduction in the time between the date when the futures contract is closed and its delivery month None of the above Which of the following is NOT true? - ANS-An American option can be exercised at any time during its life *When a CBOE call option on IBM is exercised, IBM issues more stock* A put option will always be exercised at maturity if the strike price is greater than the underlying asset price An call option will always be exercised at maturity if the underlying asset price is greater than the strike price Which of the following is NOT true? - ANS-A put option gives the holder the right to sell an asset by a certain date for a certain price *The holder of a call or put option must exercise the right to sell or buy an asset* The holder of a forward contract is obligated to buy or sell an asset A call option gives the holder the right to buy an asset by a certain date for a certain price Which of the following is a reason for hedging a portfolio with an index futures? - ANS-The portfolio is not well diversified and so its return is uncertain A company due to pay a certain amount of a foreign currency in the future decides to hedge with futures contracts. Which of the following best describes the advantage of hedging? - ANS-It leads to a better exchange rate being paid It caps the exchange rate that will be paid *It leads to a more predictable exchange rate being paid* It provides a floor for the exchange rate that will be paid A company enters into a long futures contract to buy 1,000 units of a commodity for $60 per unit. The initial margin is $6,000 and the maintenance margin is $4,000. What futures price will allow $2,000 to be withdrawn from the margin account? - ANS-58 66 64 *62* A company enters into a short futures contract to sell 50,000 units of a commodity for 70 cents per unit. The initial margin is $4,000 and the maintenance margin is $3,000. What is the futures price per unit above which there will be a margin call? - ANS-78cents *72cents