Question

Which of the following is a hedge strategy?

Multiple Choice

• A cereal company purchasing corn in the spot market.

• A farmer going short corn futures.

• A bank shorting index futures.

• An auto manufacturer shorting steal futures.

Briefly describe the differences between the Security Market Line (SML) and Characteristic Line in terms of:

(1) the alpha depicted in each of the two graphs.

(2) the beta depicted in each of the two graphs.

Answer 1

1. A farmer going short on corn futures will be a hedging strategy because, In normal market, a farmer will be producing corn, but in the future market he has shorted the corn so, he has taken an alternate position that will prevent the downside if the prices of corn will go down.

Cereal company purchasing corn or Bank shorting index future aur auto manufacturing shorting Steel futures are all exposing them to higher risk rather than hedging them

Correct answer is option ( B) Shorting corn future.