ch23_selftest-conceptreview

ch23_selftest-conceptreview - Chapter 23: Answers to...

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Chapter 23: Answers to Concept Review Questions 1. In response to the U.S. senator’s description as an electronic pyramid scheme, it can be said that derivative securities can be very risky, and they can be used for speculative purposes. However, derivatives can also be used to hedge various risk exposures, and in that sense they are more like insurance than a pyramid scheme. 2. Hedging occurs when a firm uses derivative contracts to offset existing risks in the business. Speculation involves buy or selling a financial instrument to place a bet on the direction that an underlying asset will move. 3. If equation 23.2 does not hold, then the forward price, F, is either higher or lower than the right-hand side. If F is higher, then the forward price is “too high” in some sense, so a trader could buy the asset in the spot market and sell it in the forward market to earn a profit. If F is
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ch23_selftest-conceptreview - Chapter 23: Answers to...

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