Hedging strategies using future(Hull's chapter 3)----2011 Practice question

[[email protected]]

quest. #152.1

David, after solving this question i realised that my solution was different from yours. i would appreciate it if you confirm whether my answer to the question is correct or wrong. i am confused if i did the right thing, although i had the orrect answer. please find my solution below;

S2 - S1 = 7.3-7.0 =0.30
F2 - F1 = 9.1-9.0=0.10
Basis = (S2-S1) - (F2 - F1)
= 0.30 - 0.10
= +0.20(strenthening of the basis)

 

[David Harper CFA FRM]

Hi barrour,

My answer is:
152.1. C. Basis strengthens by +$0.20 because -1.80 - (-2.00) = +0.20
basis T1 = $7.00 - $9.00 = -$2.00
basis T2 = $7.30 - $9.10 = -$1.80
-1.80 - (-2.00) = +0.20

Such that if:
b1 = S1 - F1,
b2 = S2 - F2

change in basis = b2 - b1 = (S2 - F2) - (S1 - F1) = S2 - F2 - S1 + F1 = (S2 - S1) - (F2 - F1)
+ change = strengthen of basis; - = weaken of basis

So, your looks fine to me, and (although not teased out like this in Hull) is somewhat natural IMO: as basis is difference between spot and forward, basis change is difference between change in spot and change in forward.

Hope that confirms, thanks, David

 

[[email protected]]

thanks so much. i appreciate your help

 

[[email protected]]

hi David,

quest. 154.1: in the solution, you stated that "a single silver future contract is for 5,000 ounces." is this always the case or the you calculated it? i visited the link you gave but it couldn't populate any information for me. is this figure going to be part of the question?

thanks

 

[David Harper CFA FRM]

Hi baffour,

Are you sure about the link? see
http://www.cmegroup.com/trading/metals/precious/silver_contract_specifications.html
see Contract Size:

The exam probably will not assume you know that; the exam will almost certainly give you the contract size
(with the possible exception of the S&P 500 contract, which i think they have historically assumed you know that's $250 * Index)

I think 5,000 ounces is the only silver contract, many of them have mini-contracts

I would have included in the question, except i thought it is more interesting to link to the CME in order to add some real life color to the question... Thanks, David

 

[[email protected]]

hi David,

thanks for the clarification.

best regards