1. Due to quantitative easing measures by countries recently, the markets had been on a massive...

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1. Due to quantitative easing measures by countries recently, the markets had been on a massive bull run. The manager of a hedge fund with long positions in shares of Exxon Mobil and holds large quantity of crude oil is now worried about a bubble forming in the markets and is looking into hedging the position. A further investigation into the correlations between the manager's positions versus the futures contracts revealed the following: Asian Heating Oil Futures US Nymex WTI Oil Futures International Brent Crude Futures Location of Futures/Delivery and Settlement Singapore Chicago Norway Correlations 0.70 0.40 0.59 a) Which instrument should be used for hedging given the location and correlation data above in the context of this US company? Briefly explain why. (15 marks) b) Will this be a long or short hedge? Explain how you will hedge the positions. (10 marks) c) Explain basis risk and convenience yield. How would this trader utilise basis and convenience yield in his work? (25 marks) End of Question 1 1. Due to quantitative easing measures by countries recently, the markets had been on a massive bull run. The manager of a hedge fund with long positions in shares of Exxon Mobil and holds large quantity of crude oil is now worried about a bubble forming in the markets and is looking into hedging the position. A further investigation into the correlations between the manager's positions versus the futures contracts revealed the following: Asian Heating Oil Futures US Nymex WTI Oil Futures International Brent Crude Futures Location of Futures/Delivery and Settlement Singapore Chicago Norway Correlations 0.70 0.40 0.59 a) Which instrument should be used for hedging given the location and correlation data above in the context of this US company? Briefly explain why. (15 marks) b) Will this be a long or short hedge? Explain how you will hedge the positions. (10 marks) c) Explain basis risk and convenience yield. How would this trader utilise basis and convenience yield in his work? (25 marks) End of Question 1