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Posted: March 9th, 2023
1.
What is meant by basis risk?
2.
What is the minimum-variance hedge ratio? What are the variables
that determine this?
3. How does one obtain the optimal hedge ratio from knowledge of
daily price changes in spot and futures markets?
4. What is tailing the hedge in the context of minimum-variance
hedging? Why does one tail the hedge?
5. In the presence of basis risk, is a one-for-one hedge, i.e., a
hedge ratio of 1, always better than not hedging at all?
6. If the correlation between spot and futures price changes is =
0:8, what fraction of cash- ow uncertainty is removed by minimum-variance
hedging?
7. The correlation between changes in the price of the underlying and
a futures contract is +80%. The same underlying is correlated with another
futures contract with a (negative)
correlation of 85%. Which of the two
contracts would you prefer for the minimum-variance hedge?
.
8. Given the following information on the statistical properties of
the spot and futures, compute the minimum-variance hedge ratio:S = 0:2,F = 0:25, = 0:96.
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