A Chocolate Company Which Uses the Futures Market to Lock

question 11

Multiple Choice

A chocolate company which uses the futures market to lock in the price of cocoa to protect a profit is an example of:

• A) a long hedge.
• B) a short hedge.
• C) purchasing futures to guard against a potential loss.
• D) Both a long hedge; and purchasing futures to guard against a potential loss.
• E) Both a short hedge; and purchasing futures to guard against a potential loss.

---

Definitions:

Par

This term typically refers to a financial instrument's nominal or face value, as opposed to its market value or price.

Negative Covenant

A clause in a contract that prohibits a borrower from taking certain actions, intended to protect the interests of the lender by maintaining the borrower's financial stability.

Current Ratio

A financial ratio indicating the capacity of a firm to cover its short-term liabilities with its current assets.

Loan Collateral

Assets a borrower offers to a lender as security for a loan, which can be seized if the loan is not repaid.