The Purpose of a Hedging Strategy Is to

question 106

Multiple Choice

The purpose of a hedging strategy is to

• A) avoid speculation on future prices.
• B) speculate that future prices will be lower than the spot price.
• C) speculate that future prices will be higher than the spot price.
• D) avoid exposure to commodity rate risk.

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Definitions:

Diseconomies of Scale

The phenomenon where, as a firm or industry grows beyond a certain point, per unit costs start increasing due to inefficiencies.

Economies of Scale

Cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output decreasing with increasing scale.

Diminishing Marginal Returns

The principle that as additional units of a factor of production are added, the increase in output will eventually decrease, holding other factors constant.

Constant Returns to Scale

A situation where increasing all inputs by a certain factor results in output increasing by the same factor, indicating proportionate scalability of production.