If managers are rational, they will hedge only 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

Hedging is primarily a risk management strategy used to reduce or limit exposure to uncertain or adverse movements in prices, rather than a tool for speculation or increasing profitability. Managers who are rational would choose to hedge when they prioritize stabilizing their financial outcomes over the pursuit of higher, yet riskier, potential profits.

If Managers Are Rational, They Will Hedge Only When They