How Can a Gold Futures Contract Be Used as a Hedge

question 50

Multiple Choice

How can a gold futures contract be used as a hedge against a potentially dramatic decrease in the price of the gold needed as an input into the production of computer microprocessors?

• A) The computer company should sell gold futures contracts.
• B) The computer company should sell more gold futures contracts than it should buy.
• C) This is a standard business situation, which would be favorable if it were to happen, so no hedge is needed.
• D) The computer company should lower its finished product prices now in anticipation of the decrease in the price of gold inputs.

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Definitions:

Group Polarization

The tendency for a group to make decisions that are more extreme than the initial inclination of its members, often observed after group discussions.

Groupthink

A psychological phenomenon that occurs within a group of people when the desire for harmony or conformity results in an irrational or dysfunctional decision-making outcome.

Encourage Doubt

To promote questioning or skepticism about certain beliefs or assumptions.

Directive Leadership

A leadership style characterized by providing clear instructions, setting goals, and closely supervising tasks to ensure they are completed as required.