Futures Contracts Allow ________

question 3

Multiple Choice

Futures contracts allow ________.

• A) investors to hedge the risks associated with favorable and known price movements.
• B) market participants to lock in a price and thereby take on price risk.
• C) investors to acquire the opportunity to benefit from a favorable price movement.
• D) market participants to trade off the benefits of a favorable price movement for protection against an adverse price movement.

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Definitions:

Cobb-Douglas Utility Functions

A mathematical representation of consumer preferences that shows how utility depends on the consumption of different goods, characterized by constant elasticity of substitution.

Pareto Optimal

A state of allocation of resources from which it is impossible to reallocate to make any one individual or preference criterion better off without making at least one individual or preference criterion worse off.

Pure Exchange Economy

An economic model where agents trade existing goods without the production of new goods, focusing on the allocation and distribution of resources.

Utility Function

A mathematical representation that ranks the preference level of different bundles of goods, showing satisfaction or happiness derived from consumption.