Asked by Andrew Allen on Jun 01, 2024
Verified
Cross-hedging can best be defined as:
A) A forward contract with the feature that gains and losses are realized each day rather than only on the settlement date.
B) Hedging an asset with contracts written on a closely related, but not identical, asset.
C) Risk that futures prices will not move directly with cash price hedged.
D) An agreement by two parties to exchange, or swap, specified cash flows at specified intervals in the future.
E) An agreement that gives the owner the right, but not the obligation, to buy or sell a specific asset at a specific price for a set period of time.
Cross-hedging
An investment strategy used to manage risk by investing in assets indirectly related to the primary exposure.
Hedging
A risk management strategy used to limit or offset the probability of loss from fluctuations in the prices of commodities, currencies, or securities.
Closely Related
Closely Related describes items, individuals, or concepts that are closely connected in terms of characteristics, functions, or relationships.
- Understand cross-hedging and its application to manage risk in financial operations.
Verified Answer
ZK
Zybrea KnightJun 06, 2024
Final Answer :
B
Explanation :
Cross-hedging involves using hedging instruments based on a related, but not identical, asset to the one being hedged. This is often done when direct hedging instruments for the asset in question are not available or are less efficient.
Learning Objectives
- Understand cross-hedging and its application to manage risk in financial operations.