A Naive Hedge Occurs When

question 230

Multiple Choice

A naive hedge occurs when

• A)an FI manager wishes to use futures or other derivative securities to hedge the entire balance sheet duration gap.
• B)a cash asset is hedged on a direct dollar-for-dollar basis with a forward or futures contract.
• C)an FI reduces its interest rate or other risk exposure to the lowest possible level by selling sufficient futures to offset the interest rate risk exposure of its whole balance sheet.
• D)an FI purchases an insurance cover to the extent of 80% of losses arising from adverse movement in asset prices.
• E)All of these.

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Definitions:

Finished Goods Inventory

The stock of completed products that are ready to be sold but have not yet been sold to customers.

Direct Labor-Hours

The cumulative hours that employees, who are actively engaged in the production process or delivering a service, put in.

Raw Materials Cost

The total cost associated with acquiring raw materials that are necessary for manufacturing goods.

Accounts Receivable

Money owed to a company by its customers for goods or services that have been delivered but not yet paid for.