Which of the following statements is correct? More than one answer may apply. A hedger owns...
Which of the following statements is correct? More than one answer may apply.
A hedger owns or plans to buy the underlying asset, a speculator does not.
A speculator owns or plans 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.
Homework Answers
Speculators basically are the traders and hedgers are investors. Speculator try to make profit from a security by price change in the market where as Hedger takes a offsetting position in a derivative in order to reduce risk in the underlying asset.
1. Its true that the hedger owns or plans to buy the underlying asset, a speculator does not as the hedger takes a offsetting position in a derivative (in order to reduce risk in the underlying asset) and speculator does not takes any position in underlying asset.
2. Hence, its false that speculator owns or plans to buy the underlying asset, a hedger does not.
3. Its true that an airline buying long oil futures is an example of speculation as it may be speculation in the market that oil prices may be about to rise and hence the airline may be buying long oil futures.
4. A politician buying cattle futures is not an example of speculation as their are no fluctuations in the market with respect to price change in cattle futures.
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