Explain Why It Is Unlikely That a Hedger Will Achieve

question 25

Essay

Explain why it is unlikely that a hedger will achieve an effective borrowing or lending rate equal to the rate locked-in at the inception of a BAB futures hedge when the position is unwound early.

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Definitions:

Demand Curve

A diagram that displays the connection between the cost of a commodity and the level of demand for it within a set timeframe.

Producer Surplus

The difference between what producers are willing to accept for a good or service versus what they actually receive, measured above the supply curve to the equilibrium price.

Price Floor

A government-imposed minimum price charged for a good or service, intended to prevent prices from falling below a certain level to protect producers or market sectors.

Producer Surplus

The difference between the amount producers are willing to accept for a good or service versus the amount they actually receive in the market.