When a Futures Contract Is Used to Hedge a Position

question 15

Multiple Choice

When a futures contract is used to hedge a position where either the portfolio or the individual financial instrument is not identical to the instrument underlying the futures, it is called ________.

• A) perfect hedging.
• B) a cross instrument.
• C) cross hedging.
• D) an hedged instrument.

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Definitions:

Legally Enforceable Right

A right that is recognized by law and can be upheld in a court.

Set Off

Set off is a legal mechanism allowing parties to mutually cancel out monetary claims against each other by offsetting debts, thereby simplifying payment processes.

Financial Asset

An asset that derives value because of a contractual claim, such as cash, stocks, bonds, and bank deposits.

Financial Liability

An obligation to deliver cash or another financial asset to another entity, or to exchange financial instruments under potentially unfavorable conditions.