Question

When a company acquires a derivative as a hedge, this implies exposing itself to a risk that is equal to the risk to which the company is already exposed by the transaction to be protected.

Select one:

a. True

b. False

Derivative instruments require a substantial monetary investment when they are first purchased.

Select one:

a. True

b. False

The use of futures contracts to cover the budgeted (future) purchase of inventory implies that the gains or losses of the derivative will be canceled when the company finally buys the inventory.

Select one:

a. True

b. False

The value of an underlying asset is derived from the value of a derivative instrument.

Select one:

a. True

b. False

Answer 1

1. False

Explanation: When a company acquires a derivative as a hedge, it exposes itself to a risk that is opposite in value to the risk the company is already exposed. For example: If a company has to pay $1,000, it will expose itself to a risk where it gets $1,000

2. False

Explanation: Derivative instruments require comparatively lesser amount of investment than the other products

3. True

4. False

Explanation: The value of a derivative instrument is derived from the value of an underlying asset .