- CFA Exams
- CFA Level I Exam
- Topic 7. Derivatives
- Learning Module 3. Derivative Benefits, Risks, and Issuer and Investor Uses
- Subject 2. Issuer and Investor Use of Derivatives
CFA Practice Question
A chocolate company that uses the futures market to lock in the price of cocoa to protect a profit is an example of ______.
II. a short hedge
III. purchasing futures to guard against a potential loss
I. a long hedge
II. a short hedge
III. purchasing futures to guard against a potential loss
Correct Answer: I and III
User Contributed Comments 6
| User | Comment |
|---|---|
| yu0825 | what is ia short hedge? |
| mishis | short hedge is when you lock price to sell. Here its price to buy cocoa.. |
| magicchip | long = buy short = sell |
| ankurwa10 | needless to add, chocolate companies need to BUY cocoa. |
| kseeba17 | Well its not exactly bought to guard against a potential loss, its bought to protect against an increase in price. AN really needs to work on using clearer language. |
| bushi | @kseeba17: It is clear enough. A hedger uses the futures market to guard against the price increase of its input so it won't incur a loss due to that. Clear? |