1. What are conversion factors? Why were conversion factors developed? How do they impact on which bond is cheapest to deliver? Under what conditions would there be no cheapest to deliver? Explain in detail.
2. What information do we discover when we look at the June15 S&P 500 futures price and the Sept15 S&P 500 futures price? Explain in detail.
3. Why does a full carry model apply so well to the US treasury bond and S&P 500 contracts? Explain in detail.
4. What is an optimal hedge and how do we calculate it? Compute the number of contracts we need in the hedge. How do we decide if we should implement the hedge? Why? Explain in detail.
Suppose you have a long cash position 200,000 ounces of gold. One gold futures contract is 100 troy ounces.
Δ Gold Price= 0.60 + 0.66 (Δ Gold Futures Price) + ε , R2=0.48
5. Compare and contrast selling Eurodollar futures and being a fixed rate payer in a swap as a risk management technique. Explain in detail.
6. Discuss the advantages and disadvantages of using futures options to hedge as compared to futures contracts. Explain in detail. (see commodity price risk management)
7. What is a long only commodity fund, describe its main features. Long only commodity fund have generated returns similar to diversified equity funds. What are the components of the returns from a long only commodity fund? Are commodities a separate asset class? Discuss.
8. Do futures prices contain information about future spot prices?
9. Compare and contrast the commitments taken on by a futures contract seller versus a buyer of a put option. Compare and contrast the commitments taken on by a futures contract buyer versus a buyer of a call option.
10. What is FASB 133? Under what conditions must a firm qualify for FASB 133 treatment? Discuss the fair value hedging accounting concept. Explain in detail.
11. Why is it important for a commercial firm have a derivative position qualify as a hedge?
Explain in detail.
12. You have a stock index portfolio with a beta of 1.0 and a market value of $10,000,000. If
you sell $10,000,000 nominal value of S&P 500 futures contracts, what is the return of
the combined stock and stock index futures contract? What have you done to the original
$10,000,000 stock market position?