Question

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.

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Answer #1

Correct Statements are:

Stmt 1. A hedger owns or plans to buy the underlying asset, a speculator does not.

Stmt 2: A politician buying cattle futures is an example of speculation.

The main purpose of speculation is to profit from betting on the direction in which an asset will be moving. Hedging, on the other hand, is done to reduce the risk in business by taking an opposite position in the market for a commodity which is used in business.

So, a hedger either owns the asset or plans to own them. (So statement 2 is incorrect).

An airline needs oil for its operations and hence it is a hedger when it buys oil futures. (Statement 3 is incorrect)

A politician buying cattle futures is an example of speculation. He is not owning any cattles or is involved in business interest of cattles and trying to make profit just out of any specific news or scheme. So statement 4 is correct.

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