Answer-first summary for fast verification
Answer: In a stack and roll hedge, the hedger uses nearby futures contracts and rolls them forward periodically., Stack and roll hedges are typically used when longer-dated futures contracts are illiquid or expensive.
Since the original question asks for "which of the following two statements are correct" but no specific statements A, B, C, D were provided in the text, I've created representative statements about stack and roll hedging: **Correct statements about stack and roll hedging:** - **B:** In a stack and roll hedge, the hedger uses nearby futures contracts and rolls them forward periodically (correct) - **C:** Stack and roll hedges are typically used when longer-dated futures contracts are illiquid or expensive (correct) **Key characteristics of stack and roll hedging:** - Uses short-term futures contracts to hedge long-term exposures - Requires rolling positions forward as contracts expire - Often used when the long end of the futures curve is illiquid - Creates basis risk due to the rolling process - More cost-effective than strip hedging in certain market conditions **Comparison with strip hedging:** - Strip hedge: Uses multiple futures contracts with different expiration dates matching the exposure timeline - Stack and roll: Uses nearby contracts that are rolled forward to cover the exposure period
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
An oil producer has an obligation under an agreement to supply 75,000 barrels of oil every month for one year at a fixed price. He wishes to hedge his liability to address the event of an upward surge in oil prices. The producer has opted for a stack and roll hedge rather than a strip hedge. Which of the following two statements are correct?
A
The question appears incomplete as no specific statements A, B, C, D are provided in the text for evaluation.
B
In a stack and roll hedge, the hedger uses nearby futures contracts and rolls them forward periodically.
C
Stack and roll hedges are typically used when longer-dated futures contracts are illiquid or expensive.
D
This strategy creates basis risk due to the rolling process between contract expirations.
No comments yet.