A hedged position that combines a long position of 10 futures contracts on the S

Question

A hedged position that combines a long position of 10 futures contracts on the S&P500 Maxi contract and a short position of 50 futures contracts on the S&P500 Mini contract, (both have the same delivery / expiration date)

Please select an answer and explain why.

Answer choices:

A.

is subject to mark-to-market risk

B.

is subject to liquidity risk

C.

is subject to basis risk

D.

is subject to credit risk

E.

none of the above

A.

is subject to mark-to-market risk

B.

is subject to liquidity risk

C.

is subject to basis risk

D.

is subject to credit risk

E.

none of the above

Explanation / Answer

The futures contracts on SP 500 is very liquid and there is no credit risk as transactions are secured and guaranteed by the exchange. It is only exposed to mark to market risk. Mark to market risk occurs due to change in the price of underlying asset and so as change in futures prices. Since, the given strategy is not a complete hedge, it is always exposed to mark to market risk.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.