Adverse Selection Occurs When an Informed Individual Is ________ Willing

question 1

Multiple Choice

Adverse selection occurs when an informed individual is ________ willing to trade in situations that make trading ________ to an uninformed trading partner.

• A) more; more advantageous
• B) more; less advantageous
• C) less; more advantageous
• D) less; less advantageous

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Definitions:

Hedge Ratio

The ratio of the value of a hedge (protective investment) to the value of the underlying assets, indicating the part of the asset's risk that is being mitigated.

Hedged Portfolio

An investment portfolio that uses strategies to offset potential losses or gains, aiming to reduce the risk of adverse price movements in its assets.

Delta

In finance, delta represents the rate of change of the theoretical option price with respect to changes in the underlying asset's price.

Call Option

A financial contract giving the buyer the right, but not the obligation, to buy a stock, bond, commodity, or other asset at a specified price within a specified time.