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FRM Part I · FRM Exam Part I · Using Futures for Hedging

A company hedges a long-dated commodity purchase using a stack-and-roll strategy with short-dated futures. Which risk is most directly introduced by this rolling hedge, as distinct from a single matched-maturity hedge?

The main added risk is roll risk: the spread between successive contract months can change at each roll, so the final hedged price is uncertain. Interim futures losses also require margin funding before offsetting gains on the underlying exposure appear, creating liquidity risk.

  1. AExposure to changes in the futures spread between contract months at each roll, plus possible interim margin funding strainCorrect
  2. BThe elimination of basis risk because short contracts are more liquid
  3. CCertainty about the final cost because each roll locks in the original price
  4. DCredit exposure to the clearinghouse that rises with each roll at constant margin

Explanation

Each roll closes the near contract and opens the next, so the firm bears the spread between months, which is not fixed at inception. Interim losses must be funded by margin even if the underlying exposure gains later, creating liquidity risk, as in Metallgesellschaft. Rolling does not lock in the original price.

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