For the following scenarios, describe a hedging strategy using futures contracts. Discuss the reasons for your choice of contract.
a. A bank derives all its income from long-term, fixed-rate residential mortgages.
b. A stock mutual fund invests in large, blue-chip stocks and is concerned about a decline in the stock market.
c. A U.S. exporter of construction equipment has agreed to sell some cranes to a German construction firm. The U.S. firm will be paid in euros in three months.
Finally, comment on whether using option contracts in the above cases could be better. What are the pros and cons of using options?