Question

Which following statement is Incorrect? I. Money market hedges almost always return more than forward hedges...



Which following statement is Incorrect?
I. Money market hedges almost always return more than forward hedges because of the greater risk involved.
II. While hedging can protect the owner of an asset from a loss, it also eliminates any gain from an increase in the value of the asset hedged against.
III Hedging is the taking of a position, acquiring either a cash flow, an asset, or a contract (including a forward contract) that will rise (fall) in value and offset a fall (rise) in the value of an existing position
 
(a) I only. (b) II only. (c) III only. (d) I and II.
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Answer #1

The statement I is incorrect.

Statement II & III are correct as hedge is created by taking an opposite position in a future contract. Due to the opposite position, any movement in the price of asset is compensated by the opposite movement in the hedged position resulting in no loss & no profit situation.

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