1. Suppose you are a fund manager and worrying about risk arising from the uncer

Question

1. Suppose you are a fund manager and worrying about risk arising from the uncertain performance of the market as a whole. In order to reduce risk, which position of index futures do you have to take?

A. Buy

B. Sell

C. Short

D. Cover

2. Which of the following conditions does NOT cause the basis risk in hedge using futures?

a.       Length of time to hedge is shorter than the length of time for futures to expire.

b.       Length of time to hedge is longer than the length of time for futures to expire.

c.        The underlying asset of futures is not the same as the asset to be hedged

d.       The amount to be hedged is different from the amount of futures contracts

Explanation / Answer

(1) The position of index future to have taken would be buy. The correct answer is option (A).

(2) The correct answer is option (A).  Length of time to hedge is shorter than the length of time for futures to expire.

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