Futures Market Transactions Are Used to Reduce Risk

question 1

Multiple Choice

Futures market transactions are used to reduce risk.Risk may not be totally offset if:

• A)the two instruments have different maturities.
• B)payoff schedules of the two instruments are different.
• C)the volatility of the two instruments are different.
• D)the price movements are not perfectly correlated.
• E)All of the above.

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Definitions:

Bonds Mature

The point in time when a bond's principal amount is due to be paid back to the bondholder.

Interest Payments

Payments made to a lender by a borrower in return for the use of borrowed money, typically represented as an annual percentage of the loan principal.

Unrealized Gain

An increase in the value of an asset that has not been sold yet; hence, the gain is not reflected in the income statement.

Stock Investment

The purchase of shares in a company with the expectation of earning a return in the form of dividends or capital gains.