If Managers Are Rational, They Will Hedge Only When They

question 32

Multiple Choice

If managers are rational, they will hedge only when they perceive that:

• A) prices are headed in an adverse direction.
• B) derivative instruments are priced lower than actual value.
• C) risk reduction is preferable to higher potential profits.
• D)they can increase their profitability by doing so.

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Definitions:

Cash Surrender Value

The amount of money an insurance policyholder can receive from the insurer by canceling the policy before it matures or the insured event occurs.

Outstanding

Exceptionally good or prominently distinguished; can also refer to something that is yet to be paid, completed, or resolved.

Insurance Policy

A contract between an individual or entity and an insurance company, detailing the terms for the payment of claims in the event of loss.

War Zone

An area where armed conflict is taking place, often recognized as such by military authorities.