lizabeth intends to use the Hang Seng Index (HSI) futures to hedge her portfolio. Which ofthe followings is her least concern with respect to using the HSI futures contract?a) Expiry of the futures contractb) Current level of Hang Seng Indexc) Systematic risk of her portfoliod) Volatility of the stock markete) Risk-free rate
Question
lizabeth intends to use the Hang Seng Index (HSI) futures to hedge her portfolio. Which ofthe followings is her least concern with respect to using the HSI futures contract?a) Expiry of the futures contractb) Current level of Hang Seng Indexc) Systematic risk of her portfoliod) Volatility of the stock markete) Risk-free rate
Solution
To answer this question, we need to understand what each of these factors means in the context of using futures to hedge a portfolio:
a) Expiry of the futures contract: This is important because it determines when the hedge will end.
b) Current level of Hang Seng Index: This is important because it affects the value of the futures contract.
c) Systematic risk of her portfolio: This is important because it affects the overall risk of her portfolio, which she is trying to manage by using futures.
d) Volatility of the stock market: This is important because it affects the price of futures contracts.
e) Risk-free rate: This is less important in the context of using futures to hedge a portfolio. The risk-free rate is used in pricing derivatives, but once the futures contract is purchased, changes in the risk-free rate do not affect the value of the futures contract.
So, the correct answer is e) Risk-free rate.
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