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Basic Question 2 of 9
Hedging is best defined as ______.
B. using financial assets that represent a claim on other assets
C. managing short-run financial exposure due to fundamental changes in the economy
D. managing long-term financial risk due to uncertain prices or interest rates
E. reducing the exposure to price or rate fluctuations
A. eliminating the risk associated with price changes
B. using financial assets that represent a claim on other assets
C. managing short-run financial exposure due to fundamental changes in the economy
D. managing long-term financial risk due to uncertain prices or interest rates
E. reducing the exposure to price or rate fluctuations
User Contributed Comments 5
| User | Comment |
|---|---|
| viannie | It's not A because hedging can only reduce but do not totally eliminate the risks associated with price fluctuation. |
| group | The only logical choice is E since hedging does not eliminate the risk associated with the price changes it reduces the exposure of price or rate fluctuations |
| LloydBraun7 | viannie, not true that hedging cannot eliminate market risk. Picture this: you buy an S&P 500 futures contract, let's say for $10 to keep it simple. Here you're exposing yourself to the risk that upon final settlement, the etf's (or however it settles) will be worth less than $10. Say a week after, that contract trades for $12. You go out and swap the same notional volume as your futures contract, in the OTC market. Specifically, you enter into a forward contract where you receive $12 per unit of volume and you pay the settlement price of the futures contract. Here, you've completely hedged your price risk and locked in a profit of $2 per unit. |
| johntan1979 | Almost every textbook states "reduce risk". I don't think it is possible to completely remove risk. You'll be the world's most wanted man if you could do that. |
| To-be-CFA | Hedging reduces, and speculating increases the risk. |
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Learning Outcome Statements
compare the use of derivatives among issuers and investors
CFA® 2024 Level I Curriculum, Volume 5, Module 3.