Which of the following statements is correct? More than one answer is possible A
ID: 1175324 • Letter: W
Question
Which of the following statements is correct? More than one answer is possible
A hedger owns or planes to buy the underlying asset, a speculator does not.
A speculator owns or planes to buy the underlying asset, a hedger does not.
An airline buying long oil futures is an example of speculation.
A politician buying cattle futures is an example of speculation.
A hedger owns or planes to buy the underlying asset, a speculator does not.
A speculator owns or planes to buy the underlying asset, a hedger does not.
An airline buying long oil futures is an example of speculation.
A politician buying cattle futures is an example of speculation.
Explanation / Answer
Statement 1 is correct
In order to understand this, we first need to understand the propositions for hedger and speculator.
Remember, hedger wants to mitigate the risks that he might face. Speculator wants to undertake short term money making oppportunity, without any long term intent.
So, statement 1 is correct with the above explanation. Hedger plans or owns to buy underlying asset. Like in statement 3, airlines buy oil futures to prevenyt any adverse price shocks related to oil for company. So statement 3 is also inccorect.
Statement 2 is incorrect with the same above logic.
Statement 4 may or may not be correct. If the politicain is taking an opportunity of some upcomg law, it is speculaton. If he plans to have some business or use these to support an existing business, it is hedging.
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