Use the Following Information to Answer the Question(s)below

question 97

Multiple Choice

Use the following information to answer the question(s) below. The risk-free rate of interest is 3% and the market risk premium is 5%.
-The cost of capital for the oil exploration division is closest to:

• A)6.0%.
• B)7.0%.
• C)8.5%.
• D)10.0%.

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Definitions:

Loss

The reduction in the value of an investment or the difference between the purchase price and the lower selling price.

Basis Risk

The risk that the price of a futures contract may not move in tandem with the price of the underlying asset, leading to potential losses in a hedging strategy.

Basis

The spot price minus the futures price.

Short Hedger

An investor who enters into contracts or investment positions to reduce the risk of price decreases in an asset they currently own or plan to own.