Fin Dev 2

HideShow resource information
What is a short hedge? (with futures)
A short hedge is the selling of futures contracts to cover a cash position. Suitable for a company who is due to sell an asset at a particular time in the future.
1 of 9
What is a long hedge? (with futures)
A long hedge is the buying of futures in anticipation of a cash purchase. Suitable for a company which is to buy an asset in the future and wants to lock in a price today.
2 of 9
Why is it difficult to obtain a perfect hedge with futures contracts?
i) asset whose price is the subject of the hedge may not be exactly the same as the asset underlying the future. ii)Hedger may be uncertain as to the exact date the asset is to be sold/bought. iii)futures contract may be closed before expiration date
3 of 9
Why might a company not hedge their exposure to risk?
If a company's competitors are not hedging then it may experience less risk from not hedging. Shareholder might not want the company to hedge. If hedge produces a loss hard to justify its use.
4 of 9
What happens to a short hedgers position if basis strengthens or weakens unexpectedly?
Short hedger is long in the asset and short in the futures contract. Therefore value of their position increases as the basis strengthens and decreases as it weakens.
5 of 9
What is the initial margin? How does it differ in the US and the UK?
The initial margin is the good faith deposit that an investor must pay to the clearing house in order to enter into a futures contract. In the US it is normally a fixed percentage of the market value of the contract. UK use software to assess risk.
6 of 9
What is the maintenance margin? What is a margin call?
The maintenance margin is a percentage of the initial margin that must be available in the traders margin account at all times. If it falls below this margin a margin call is issued and the account must be topped up or it will be closed.
7 of 9
Describe the marking-to-market procedure.
The marking to market procedure occurs on a daily basis as traders accounts are credited/debited with the daily losses or gains as the futures price fluctuates.
8 of 9
Why are swaps useful?
Swaps are mainly used to: lock in rates over streams of demand and supply; consolidate balance sheets; restructure liabilities.
9 of 9

Other cards in this set

Card 2

Front

What is a long hedge? (with futures)

Back

A long hedge is the buying of futures in anticipation of a cash purchase. Suitable for a company which is to buy an asset in the future and wants to lock in a price today.

Card 3

Front

Why is it difficult to obtain a perfect hedge with futures contracts?

Back

Preview of the front of card 3

Card 4

Front

Why might a company not hedge their exposure to risk?

Back

Preview of the front of card 4

Card 5

Front

What happens to a short hedgers position if basis strengthens or weakens unexpectedly?

Back

Preview of the front of card 5
View more cards

Comments

No comments have yet been made

Similar Other resources:

See all Other resources »See all Financial Derivatives resources »