Identify the correct statement about corporations.
A)Corporations are risk neutral because they can diversify all risks except idiosyncratic risk.
B)Corporations should ideally hedge risks only at prices lower than the AFP.
C)Corporations buy hedging instruments at greater price than AFP.
D)The individual level utility functions of risk aversion can explain the hedging behavior of corporations.
E)Corporations are risk neutral because they can diversify systematic risk.

Question

Quizplus · Accepted Answer

Corporations often engage in hedging to manage risk, and in doing so, they may end up paying a premium over the actuarially fair price (AFP) for hedging instruments. This is because the value of reducing risk exposure can outweigh the cost, especially for risks that can have significant impacts on their operations or financial stability.

Identify the Correct Statement About Corporations