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:

Extraverts

Individuals characterized by their outgoing, sociable, and lively behaviors, often seeking stimulation from the external environment.

Suites

Sets of interconnected rooms designed to be used together within a larger structure, often found in hotels or office buildings.

Conscientious

Characterized by carefulness, diligence, and a desire to do a task well.

Defensive

Relating to a behavior or mindset aimed at protecting oneself from criticism, harm, or other perceived threats.