Managers are willing to pay a price to hedge because:
A)They receive increased profits in return
B)The returns on derivative instruments are not taxed
C)They value the reduction in uncertainty
D)It permits the managers to receive higher cash bonuses

Question

Quizplus · Accepted Answer

Managers are willing to pay a price to hedge because they value the reduction in uncertainty. Hedging allows them to mitigate the risks and uncertainties associated with their business operations or investments, which can improve their decision-making, planning, and overall financial performance. While hedging may entail some costs or fees, the benefits of risk reduction generally outweigh them. The other options (A, B, D) are not necessarily true or relevant for all managers or situations. For example, not all hedging strategies increase profits, as some may involve sacrificing potential gains for protection. Additionally, the tax treatment of derivatives depends on various factors, such as the type of instrument, the holding period, the purpose, and the jurisdiction. Lastly, cash bonuses may or may not be linked to hedging outcomes, depending on the company's policies, objectives, and performance measures.

Managers Are Willing to Pay a Price to Hedge Because