A company with an investment in equity securities hedges this position by investing in short futures on the stock. This hedging relationship will generally have some effect on income, even though the terms match exactly, because:

Question

Quizplus · Accepted Answer

The correct answer is B because gains and losses on stock futures are indeed valued based on changes in futures rates, while gains and losses on the stock itself are valued based on changes in the current market rates. This difference in valuation methods can lead to mismatches in the hedging relationship, affecting income even if the terms of the hedge match exactly.

A Company with an Investment in Equity Securities Hedges This