FRM Part I · FRM Exam Part I · Using Futures for Hedging
A fund holds USD 30 million of an equity portfolio and hedges with index futures. The optimal hedge ratio is 0.75. One futures contract has a notional value of USD 250,000 (index level times multiplier). How many futures contracts should the fund short?
The fund should short 90 contracts. The number of contracts equals the hedge ratio times exposure divided by contract value: 0.75 times USD 30 million divided by USD 250,000, which is 0.75 times 120, or 90. A one-to-one hedge would give 120.
- A120
- B90Correct
- C160
- D75
Explanation
N* = h* x Q_A / Q_F = 0.75 x 30,000,000 / 250,000 = 0.75 x 120 = 90 contracts. Ignoring the hedge ratio gives 120, which is the distractor from using a one-to-one hedge.
Did you get it right without looking?
One question tells you little. A timed set on Using Futures for Hedging shows your real accuracy, how long you take and where you lose marks.
More Using Futures for Hedging questions
- A company hedges a long-dated commodity purchase using a stack-and-roll strategy with short-dated futures. Which risk is most directly intro…
- A portfolio manager holds an asset worth 12 million and hedges with futures. The hedge ratio is estimated from a regression of spot changes …
- A portfolio manager holds an equity portfolio worth $20 million with a beta of 1.2 relative to the S&P 500. The index futures price is 4,000…
- An airline hedges jet fuel using crude oil futures. The standard deviation of the change in jet fuel price is 0.30 and that of the futures p…
- A portfolio manager holds a $20 million equity portfolio with a beta of 1.2 relative to the S&P 500. The S&P 500 futures price is 4,000 and …
- A hedger has a spot exposure with variance of price changes 0.0400 and uses a futures contract with variance 0.0225. The correlation is 0.60…