hard · FRM Part 1 Financial Markets and Products
A multinational energy firm implements a 'stack-and-roll' strategy to hedge long-dated, fixed-price oil delivery contracts maturing in 10 years. They utilize short-dated front-month futures.
If the oil market shifts from backwardation to a persistent contango, which of the following best describes the mechanical impact on the firm's financial position?
- The firm will realize a negative roll yield, as expiring long futures are sold at lower prices than the incoming deferred contracts.
- The firm will experience a positive roll yield because the deferred contracts trade at a discount to the front-month contracts.
- The margin calls on the futures leg will be perfectly offset by immediate cash inflows from the long-dated OTC delivery contracts.
- The firm's basis risk is eliminated because the short-dated futures converge to the spot price at every monthly expiration.
Sign up free to see the explanation and track your rank →
More FRM Part 1 Financial Markets and Products practice
- If at the time of delivery S_1 = $72 and F_1 = $74, while the hedge was entered at F_0 =
- A trader creates an iron condor by selling a 90 put, buying… — What is the maximum loss fo
- An American put option is deep in the money. Why might it be optimal to exercise this opti
- The variation margin is the cash amount that is:
- What is the maximum possible loss for an investor who writes (shorts) a naked call option?
- If the standard deviation of futures price changes (σ_F) is much larger than the standard
- Which exotic option would a speculator use if they believe a stock will experience a massi
- If at maturity the futures price were significantly higher than the spot price, what would