Which of the Following Would Be an Effective Hedge?
A)Sell $\le$

question 49

Multiple Choice

Which of the following would be an effective hedge?

• A)Sell \(\le\)7,500 forward at the 1-year forward rate, F₁($/\(\le\)), that prevails at time zero.
• B)Buy \(\le\)2,500 forward at the 1-year forward rate, F₁($/\(\le\)), that prevails at time zero.
• C)Sell \(\le\)25,000 forward at the 1-year forward rate, F₁($/\(\le\)), that prevails at time zero.
• D)None of the above

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Definitions:

Markowitz Model

A portfolio optimization theory that demonstrates how to achieve the best portfolio allocation to maximize return for a given level of risk through diversification.

Systematic Risk

The risk inherent to the entire market or entire market segment, which cannot be eliminated through diversification.

Index Model

A model that describes the relationship between the returns of a stock and the returns of a market index.

Covariance

A measure of the degree to which two variables move in relation to each other, with a positive covariance indicating that they tend to move in the same direction.