True or False Question: Southwest Airlines is exposed to risk to fluctuations in jet fuel prices. One way they can partially hedge this risk is to short crude oil futures. I think the answer is false, but not really sure. If Southwest Airlines anticipates that jet fuel prices might rise, the appropriate strategy would indeed be to go long on crude oil futures. By going long, they would agree to buy crude oil at a future date at a predetermined price. If the actual prices go up, this position allows them to secure fuel at a lower cost than the market rates at the time of delivery, effectively hedging against rising prices. Don't use chatGPT for this. I don't think it's right.

(a) True or False: The difference between the price of oil in California and the price of oil in Texas implies that there is an opportunity to arbitrage.    (b) True or False: If the price of corn in market X is higher than market Y, then corn will be transported from market X to Y.  (c) True or False: The basis for a cash market at the futures delivery point will decrease to zero at the expiration of its associated futures contract. (d) True or False: The basis for all cash markets will decrease to zero at the expiration of its associated futures contract.

Suppose a oil producer wants to hedge against possible price fluctuations in the market. For example, in November, he decides to enter into a short-sell position in a 2 (two) futures contracts in order to limit his exposure to a possible decline in the cash price prior to the time when he will sell his oil in the cash market. Assume that the spot price of oil is $30 and the futures price for a March futures contract is $45. What is the basis?  Выберите один ответ: a. 30 b. 7.5 c. 25 d. 15 e. 45

Suppose your client says, “I am invested in Japanese stocks but want to eliminate my exposure to this market for a period of time. Can I accomplish this without the cost and inconvenience of selling out and buying back in again if my expectations change?”a. Briefly describe a strategy to hedge both the local market risk and the currency risk of investing in Japanese stocks.b. Briefly explain why the hedge strategy you described in part               (a) might not be fully effective.

Some firms face risks that they cannot efficiently hedge using plain vanilla options. This motivates them to resort to exotic options. For example, consider a basket option where the underlying asset is the average between the FTSE 100 (main UK stock index) and the S&P 500 (main US index). This contract is well-suited for a company that has its investments equally split between the UK and US stock market. Other exotic options have an even more peculiar design (contract specification, payoff, etc.) so as to meet very particular hedging needs. What are the two most interesting examples you can think of? Describe the underlying risk that a firm wants to hedge and how the exotic option provides an efficient insurance against it.

Suppose you are concerned about your firm’s jet fuel exposure. Further, your analysis suggests the best futures contract to hedge jet fuel is unleaded gasoline. The fuel volatility (standard deviation of changes in' your firm’s entire jet fuel exposure) is $17,347,281, and the unleaded gasoline futures contract volatility (standard deviation of price changes in one unleaded gasoline futures contract) is $14,490. Suppose the correlation coefficient between fuel volatility and unleaded gasoline futures contract volatility is 0.71. Calculate the minimum variance hedge ratio. Defend whether this’ is a perfect hedge.

A U.S. exporting firm may use foreign exchange futures to hedge its exposure to exchange rate risk. Its position in futures will depend in part on anticipated payments from its customers denominated in foreign currency.a. In general, however, should its position in futures be more or less than the number of contracts necessary to hedge these anticipated cash flows? (Hint: Think about the firm's stream of cash flows extending out over many years.)b. What other considerations might enter into the hedging strategy?

a) If you must buy some asset in future and you just want to hedge the risk what sort of derivative trading will you do? Explain in brief with payoff diagram. b) If you have long position in one asset and you want to hedge the risk of price drop in that asset while still having the upside in case the asset price goes up, what sort of derivative trading will you do? Explain in brief with payoff diagram. c) Briefly explain the benefits of having a thriving capital markets even in an economy like India where banking system provides most of the funding to firms. d) What are the four types of traders? Name two types who facilitate the price discovery process and briefly state how do they facilitate?

How can we obtain a pay-domestic-floating, receive-foreign-fixed currency swap by using a pay-domestic-fixed, receive-foreign-fixed currency swap and an appropriate interest rate swap?   Given the following American put option prices and current underlying share price of $304.75, check to see whether the given put options violate the lower bound condition. Where you detect a violation, devise an arbitrage strategy that will yield a positive cash flow now with zero possible cash flows in the future. Strike            Put price 300                 7.75 305                 8.15 310                 8.5 315                 9.05

Part I. Explain why an American call options on futures could be optimally exercised early while call options on the spot can not be optimally exercised. Assume that there is no dividend. Explain how to use call options and put options to create a synthetic short position in stock. Part II. Indicate whether each of the following two statements below is true, false or uncertain and justify your response. It is theoretically impossible for an out-of-money European call and an in-the-money European put to be trading at the same price. Both options are written on the same non-dividend paying stock. A 3-month European put option on a non-dividend-paying stock is currently selling for $3.80. The stock price is $48.0, the strike price is $51, and the risk-free interest rate is 6% per annum (continuous compounding). There is no arbitrage opportunity in this scenario.