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1. A company that purchases copper for its production facility is considering hedging its exposure via forward or futures contracts. Which of the following statements

1. A company that purchases copper for its production facility is considering hedging its exposure via forward or futures contracts. Which of the following statements is false?

  1. For a given maturity, futures and forward prices are likely to be approximately equal.
  2. A futures position is more likely to expose the company to liquidity problems than an otherwise equivalent forward position.
  3. A forward position is more likely to experience losses from counterparty default if the price of copper rises.
  4. A futures hedge will incur losses if the basis (spot price-futures price) increases.
  5. None of the above.

C

D

B

A

E

2. Consider a speculator with a long American call option on a stock. The call has a strike of $30 and a maturity of 6 months. The stock is currently trading at $42 and there are no expected dividends over the coming 6 months. The speculator believes the stock price has peaked and wishes to close their position. The speculator should

  1. Do nothing because it is never optimal to exercise early.
  2. Exercise the option, and then sell the stock in the spot market.
  3. Sell an otherwise equivalent American put.
  4. Hedge the exposure using a long futures contract.
  5. None of the above

A

B

D

C

E

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