- 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 hedger takes a position in the futures market in order to ______.
B. decrease a pre-existing risk in search of higher return
C. decrease a pre-existing risk even though doing so may decrease returns
A. increase a pre-existing risk in search of higher returns
B. decrease a pre-existing risk in search of higher return
C. decrease a pre-existing risk even though doing so may decrease returns
Correct Answer: C
By definition, a hedger acts as described in C.
User Contributed Comments 4
| User | Comment |
|---|---|
| viannie | Hedge = decrease pre-existing risks which reduces loss but at the same time, reduces returns. (Something got to give, reduce loss but also reduce gains) |
| ankurwa10 | remember, there are no free lunches? You can't have it all. |
| dbedford | Think of it like an investor who buys bonds in thier portfolio to hedge against market risk. Risk goes down for the portfolio and so does potential overall return |
| khalifa92 | good example |