A hedge with futures contracts increases volatility in profit gains on both the upside and downside of interest rate movements, whereas in comparison, the hedge with the put option contract completely offsets the gains but only partially offsets the losses.

Question

Quizplus · Accepted Answer

A hedge with futures contracts aims to lock in prices to reduce volatility in profit gains from interest rate movements. A hedge with a put option contract provides the right, but not the obligation, to sell at a certain price, thus it can protect against downside risk while allowing for upside potential, not completely offsetting gains.

A Hedge with Futures Contracts Increases Volatility in Profit Gains