Which of the Following Is a Fundamental Problem Associated with Futures

question 18

Multiple Choice

Which of the following is a fundamental problem associated with futures contracts in hedging?

• A)Convenience yields affect forward or futures hedge ratios when the maturity of the future obligation hedged matches the maturity of the futures or forward contract used to hedge.
• B)Large amount of cash needs to be exchanged when future contracts are initiated which will offset the hedging benefit.
• C)Compared to forward contracts,there is a higher probability of default associated with futures contracts,which increases the risk of hedging.
• D)Most futures contracts have relatively short maturities which do not help the long-term commitments of corporations.

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Definitions:

Stoma

A tiny opening or pore, found in the epidermis of leaves and stems, that is used for gas exchange.

Parenchyma

A type of plant tissue composed of living cells, often the most abundant type of cell in plants, involved in photosynthesis, storage, and regenerative processes.

Axil

The angle or area between the upper side of a leaf or stem and the supporting stem or branch.

Petiole

A slender stem that attaches the leaf blade to the plant stem, enabling nutrient and water transport.