How might a portfolio manager use financial futures to hedge risk in each of the following circumstances:
a. You own a large position in a relatively illiquid bond that you want to sell.
b. You have a large gain on one of your long Treasuries and want to sell it, but you would like to defer the gain until the next accounting period, which begins in four weeks.
c. You will receive a large contribution next month that you hope to invest in long-term corporate bonds on a yield basis as favorable as now available.
Futures are marketable forward contracts to buy or sell specified financial instruments. They come in three types: interest rate, indices, and individual stocks. A futures holder can take two positions: short (selling futures) or long (buying futures).
a. Assets underlying interest rate futures are often treasuries. Treasury note futures are ...
Risk reducing financial transactions: hedge raw materials prices
(1) Why might a firm undertake risk-reducing financial transactions, for example, a hedge against fluctuations in raw materials prices? Give at least one good reason. What types of risk-reducing financial transactions does your organization use?
(2) Which of the following companies would be more likely to hedge its raw materials prices? Explain your answer.
- A mature firm with no debt outstanding.
- A growth firm that will rely on debt to finance future capital investments.