Monthly Archives: May 2014

Fredonia Inc. had a bad year in 2013. For the first time in its history, it operated at a loss. The company’s income statement showed the following results from selling 80,000 units of product: Net sales $2,000,000; total costs and … Continue reading →

Cross-Hedging – Describe the act of cross-hedging. What determines the effectiveness of a cross-hedge? Here’s the SOLUTION

Impact of Futures Hedge – Explain how the probability distribution of a financial institution’s returns is affected when it uses interest rate futures to hedge. What does this imply about its risk? Here’s the SOLUTION

Long versus Short Hedge – Explain the difference between a long hedge and a short hedge used by financial institutions. When is a long hedge more appropriate than a short hedge? Here’s the SOLUTION

Hedging Decision -Why do some financial institutions remain exposed to interest rate risk, even when they believe that the use of interest rate futures could reduce their exposure? Here’s the SOLUTION

Hedging with Futures Assume a financial institution has more rate-sensitive assets than rate-sensitive liabilities. Would it be more likely to be adversely affected by an increase or a decrease in interest rates? Should it purchase or sell interest rate futures … Continue reading →

Treasury Bond Futures – Will speculators buy or sell Treasury bond futures contracts if they expect interest rates to increase? Explain. Here’s the SOLUTION

Hedging with Futures – Explain why some futures contracts may be more suitable than others for hedging exposure to interest rate risk. Here’s the SOLUTION

Futures Pricing – How does the price of a financial futures contract change as the market price of the security it represents changes? Why? Here’s the SOLUTION

Futures Contracts – Describe the general characteristics of a futures contract. How does a clearinghouse facilitate the trading of financial futures contracts? Here’s the SOLUTION