Study guide course part 3 - EC330 Problem Set 3 Due in...

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EC330: Problem Set 3 Due in class: Tuesday, March 29 Multiple choices Suppose you are a manager for a company that produces grape jelly. Which of the following is the best way for you to reduce your risk? acquire a derivative that increases in value if grape prices increase acquire a derivative that increases in value if grape jelly prices increase sell a derivative that increases in value if grape prices increase sell a derivative that increases in value if grape jelly prices increase Forward transactions would be useful to a government wanting to know the size of its future debt. a household wanting to reduce its future tax liability. a business wanting to know the cost of its funds on future loans. a business wanting to expand its operations in overseas markets. Forward contracts are often illiquid because any capital gains on them are heavily taxed, making investors reluctant to sell them. government regulation has not provided for a secondary market in them. they generally contain terms specific to the particular buyer and seller. the brokerage fees involved in buying and selling them are very high. If you look at the financial page listings for futures contracts and find that futures prices on Treasury bonds are falling over a particular time period, futures market investors must expect that Treasury bond prices will be higher in the future. Treasury bond yields will be higher in the future. Treasury bond yields will be lower in the future. futures prices will rise again at the end of the period. As the time of delivery in a futures contract gets closer
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the futures price gets closer to the spot price. the futures price generally rises further above the spot price.
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