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International Certificate in Banking Risk and Regulation (ICBRR) Questions 161–165 (page: 34)

A proprietary trading desk for a large bank hedges an Arab light OTC forward position with Brent crude oil forwards. The trading desk benefits from using the most liquid OTC market to hedge, the market for the Brent crude, but hedging its using the Brent contract, exposes itself to the following type of risk:

In early March, an energy trader takes a long position in natural gas futures for delivery in June, and hedges this exposure by taking a position in futures for July delivery. These trades were executed on the expectation that over time, the relative prices of the June and July contracts will come into alignment, the movement in these two contracts will largely mirror each other, and as a result of this, the net exposure is minimized and the position is protected against absolute price movements. However, if the two relative prices do not come into alignment with each other due to the scarcity of any of the two traded contracts in the futures market, the trader is likely to become exposed to the

Which one of the following four statements regarding commodity derivative risks is INCORRECT?

A bank customer can use either a plain vanilla option or an option contract with volumetric flexibility to reduce the following risks:

I) Market Risk
II) Basis Risk
III) Operational Risk

From a risk point of view, which of the following factors will generally lead to the fluctuation of equity values with industry P/E levels and a company's individual earnings?

I) Sales
II) Cost management
III) Commercial success of the company
IV) Market sentiment