If managers are rational, they will only hedge when they perceive that:
A)prices are headed in an adverse direction.
B)derivative instruments are priced lower than actual value.
C)risk reduction is preferable to higher potential profits.
D)they can increase their profitability by doing so.

Question

Quizplus · Accepted Answer

Rational managers will only hedge when they perceive that risk reduction is preferable to higher potential profits. This means that they weigh the potential benefits of hedging (reducing risk) against the potential costs (reduced profitability) and make a decision based on which is more important to them. Hedging is not always the best choice, and managers must carefully consider the trade-offs involved. Options A, B, and D may also be factors that contribute to a manager's decision to hedge, but the ultimate decision should be based on a rational assessment of the costs and benefits.

If Managers Are Rational, They Will Only Hedge When They