Short Concept Questions

$3\mathrm{.}1.$ Under what circumstances are short hedges and long hedges appropriate?

$3\mathrm{.}2.$ Give three reasons why the treasurer of a company might choose not to hedge a particular risk.

$3\mathrm{.}3.$ Explain how basis risk arises in hedging.

$3\mathrm{.}4.$ What is the formula for the minimum variance hedge ratio when daily settlement is ignored?

$3\mathrm{.}5.$ How is the formula for the minimum variance hedge ratio changed to take account of daily settlement?

$3\mathrm{.}6.$ Suppose that the standard deviation of quarterly changes in the prices of a commodity is $8,$ the standard deviation of quarterly changes in the futures price on the same commodity is $10,$ and the coefficient of correlation between the two changes is $0\mathrm{.}8.$ What is the optimal hedge ratio for a $3-$month contract? What does it mean?

$3\mathrm{.}7.$ A company has a $2$ million portfolio with a beta $1\mathrm{.}2.$ It would like to use futures contracts on the Nifty $50$ to hedge its risk. The index is currently standing at $8400$ and each contract is for delivery of $200$ times the index. What is the hedge that minimizes risk? What should the company do if it wants to reduce the beta of the portfolio to $0\mathrm{.}6?$

$3\mathrm{.}8.$ How might investors who consider themselves adept at stock picking use index futures?

$3\mathrm{.}9.$ Explain what the stack and roll hedging strategy involves.

$3\mathrm{.}10.$ Explain how hedging using futures can lead to cash$-$flow problems such as those experienced by Metallgesellschaft.