5. Risk Management

Hedging Strategies — Quiz

Test your understanding of hedging strategies with 5 practice questions.

Practice Questions

Question 1

Which of the following best describes the primary benefit of using an option contract for hedging compared to a forward contract?

Question 2

A U.S. company expects to receive $¥120{,}000{,}000$ in six months. To hedge currency risk, it enters into a forward contract at a rate of 120 JPY per USD. How many U.S. dollars will the company receive at maturity?

Question 3

A manufacturer anticipates purchasing 5,000 barrels of crude oil in three months. To hedge against price increases, it sells futures contracts at \\65 per barrel. At expiration, the spot price is \\$60 per barrel. What is the net gain per barrel on the futures position?

Question 4

A company holds floating-rate debt and wants to hedge against rising interest rates. It enters into an interest rate swap paying fixed 4% and receiving floating LIBOR. If the notional principal is \\$10,000,000 and LIBOR resets at 5%, what is the net cash flow to the company for the period?

Question 5

Which of the following best defines basis risk in cross-hedging commodity exposures?