Hedging One Commodity by Using a Futures Contract on Another

question 6

Multiple Choice

Hedging one commodity by using a futures contract on another commodity is called

• A)surrogate hedging.
• B)cross hedging.
• C)alternative hedging.
• D)correlative hedging.

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Definitions:

American Call Option

A financial contract that gives the holder the right, but not the obligation, to buy a specified asset at a certain price before the option expires.

Asset Price

The value at which an asset is bought or sold on the market.

Exercise Price

The cost at which an option holder has the right to buy or sell the base security.

Risk-Free Interest Rate

The hypothetical yield from an investment assumed to be free of any financial risk, often reflected through government bond yields.