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1) The basis is defined as spot minus futures price
1) The basis is defined as spot minus futures price. A trader is hedging the purchase of an asset with a long futures position. The basis increases unexpectedly. Which of the following is true? A. The hedger's position improves B. The hedger's position worsens C. The hedger's position sometimes worsens and sometimes Improves. D. The hedger's position stays the same
2)
Which of the following is least likely to be one of the advantages of financial intermediation?
| a. |
None of the answers are correct. |
|
| b. |
Financial intermediation enables depositors to raise capital through the primary markets. |
|
| c. |
A financial intermediary aggregates the funds of many small savers to lend to large projects which would otherwise not be available to depositors. |
|
| d. |
Financial intermediation allows the risks of a project to be spread over a large number of depositors. |
|
| e. |
Depositors in financial intermediaries gain from reduced transaction costs due to economies of scale in transactions. |
Expert Solution
1)Answer:- Option B): The hedger's position worsens
Explanation:- A trader is hedging the purchase of an asset with long futures position. The basis increase unexpectedly. It follows that the hedger's position worsens when the basis increases. As the hedger has long futures position which means buying price is fixed. If basis strengthens (or increases) that means the gap between spot and futures has increased which will worsen the position of hedger.
2)
Option B is the answer as it is incorrect
Financial Intermediation allows borrower to raise capital and gives opportunity to the depositors to invest money
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