Meant by basis risk when futures contracts

Assignment Help Accounting Basics
Reference no: EM131026922

Q1: Explain what is meant by basis risk when futures contracts are used for hedging. Next, make a comparative analysis between basis risk in futures contracts and credit risk in forward contracts. Last, compare the liquidity issue in futures and forward contracts.

Q2: A company has a USD 40 million portfolio with a beta of 1.5. It would like to use futures contracts on the S&P500 to hedge its risk. The index futures prices is currently 1,500 and each contract is for delivery of USD 250 times the index. If the company likes to minimize its risk, what is optimal hedge ratio? What is the optimal number of contracts? Last, what are the potential problems involved in the formula of optimal hedge ratio?

Q3: The following table gives the zero rates for different maturties:

Maturity (years)

Zero Rate (% cont. comp.)

Forward Rate (% cont. comp.)

0.5

5.0

 

1.0

5.8

 

1.5

6.4

 

2.0

6.8

 

a) Use the data to diagram the yield curve (i.e., zero rate curve) and explain the pattern of the yield curve using the liquidity preference theory.

b) Compute the forward rates and shows the results in the third column.

c) Describe how to determine zero rate using the data of bond price.

Q4: The S&P500 index is 2,000. The six-month risk-free rate is 2% per annum and the dividend yield over the next six months is 1.5% per annum. The nine-month risk-free rate is 5% per annum and the dividend yield over the next nine months is 1.2% per annum.

a) Estimate the futures price of the index for six-month and nine-month contracts. All interest rates and dividend yields are continuously compounded.

b) Describe how to do index arbitrage.

Reference no: EM131026922

Financial statement analysis

Judith, an accounting major, states, "Strategy analysis seems to be an unnecessary detour in doing financial statement analysis. Why can't we just get straight to the accoun

Negative or positive automatic assumptions

The point here is to be able to identify yourself with a group so that you can then explore and examine the negative or positive automatic assumptions people often apply too

Current performance appraisal process

1) As the HR manager, critically evaluate the current performance appraisal process at the Financial Security Investment including Brook's manager's behavior and decision ma

Justifying the firm survival

You should justify your choices in terms of the chosen industry/sector on the grounds of innovation, competitive advantage and, company's sustained growth and survival. Your

How should the university report the 280000 of receipts in

A private university received $280,000 from student tuition and fees for the year 20X9 summer session. The session began on June 20, 20X9, and ended on July 30, 20X9. The univ

Significant problem for the business

Is the fact that Bongo's does not charge for 10% of its pizzas a significant problem for the business? How much extra profit per pizza would be made if 5 minutes was cut from

Compute production cost per unit under variable costing

A firm expects to sell 25,000 units of its product at $11 per unit. Pretax income is predicted to be $60,000.  If the variable costs per unit are $6, total fixed costs must be

Question regarding the series of allegations

Beginning in 2006, Spike Clothing was besieged with a series of allegations that it was mistreating and underpaying workers at foreign facilities. Spike responded to these c

Reviews

Write a Review

 
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd