FRM Part I · FRM Exam Part I · Using Futures for Hedging
Which statement about hedging an equity portfolio with stock index futures is correct?
Beta hedging with index futures mainly removes systematic market risk. The portfolio's idiosyncratic risk and the basis risk between the futures and the index remain, so the hedge is not perfect and does not eliminate all risk.
- ABeta hedging removes both systematic and idiosyncratic risk from a diversified portfolio
- BBeta hedging mainly removes systematic market risk, leaving idiosyncratic and basis riskCorrect
- CA short futures hedge increases the portfolio beta
- DThe number of contracts is independent of the portfolio beta
Explanation
Index futures hedge market (systematic) exposure measured by beta. Stock-specific risk remains, as does basis risk from imperfect futures-index tracking. The other statements are wrong: short futures reduce beta, and contracts needed scale with beta.
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 hedger regresses changes in spot price (dependent variable) on changes in futures price and obtains a slope of 0.85 and an R-squared of 0.…
- An airline needs to hedge 3,000,000 gallons of jet fuel with heating oil futures. Each contract covers 42,000 gallons. The correlation betwe…
- A trader holds a long spot position and is short futures. Which basis change benefits the hedger?
- A jewelry manufacturer expects to buy gold in three months and wants to protect against a price increase. Which futures position implements …
- A company must hedge a 10-year commodity purchase programme using a stack of one-month futures that it rolls every month. Which risk is most…
- A firm wants to hedge a spot exposure of 2,000,000 barrels of crude oil for one year using futures with a minimum-variance hedge ratio of 0.…