When External Benefits Are Present in a Market

question 34

Multiple Choice

When external benefits are present in a market:

• A) the market is more efficient than if the externalities were not present.
• B) the market outcome is inefficient.
• C) overall social surplus is maximized because others are gaining in addition to the market consumers.
• D) the external benefit must be offset by an external cost.

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Definitions:

Hedge Ratio

The proportion of a position which is hedged, representing a strategy to minimize the risk of adverse price movements in an asset.

Binomial Option Model

A numerical method used in finance to price options by breaking down the option’s life into discrete time intervals.

Dynamic Hedging

A portfolio management strategy that involves continuously adjusting the hedge positions as the market conditions and prices of the underlying assets change.

Portfolio Insurance

Portfolio insurance is a strategy used by investors to hedge against market downturns by dynamically adjusting exposure to equities and typically involves the use of options or cash reserves.