Producers Who Hedge Through the Purchase of Put Options Must

question 112

Multiple Choice

Producers who hedge through the purchase of put options must remember that they may be:

• A)Reducing their profits compared to not hedging
• B)Obligated to sell their product at a lower than market price
• C)Increasing their overall risk
• D)Facing unlimited price risk

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Definitions:

Price Mechanism

The process by which the forces of supply and demand determine the prices of goods and services in a market economy.

Equity

The value of ownership interest in a company, typically represented by shares of stock.

External Cost

Refers to the cost that is not borne by the individual or entity causing it but by society or the environment, such as pollution.

Compensation

The total amount of the monetary and non-monetary pay provided to an employee by an employer in return for work performed as required.