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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?
- For a given maturity, futures and forward prices are likely to be approximately equal.
- A futures position is more likely to expose the company to liquidity problems than an otherwise equivalent forward position.
- A forward position is more likely to experience losses from counterparty default if the price of copper rises.
- A futures hedge will incur losses if the basis (spot price-futures price) increases.
- 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
- Do nothing because it is never optimal to exercise early.
- Exercise the option, and then sell the stock in the spot market.
- Sell an otherwise equivalent American put.
- Hedge the exposure using a long futures contract.
- None of the above
A
B
D
C
E
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