When a firm authorizes managers to trade contracts to hedge,it opens the door to the possibility of ________.
A) expectation profit
B) risk premium
C) free cash flows
D) speculation

Question

Quizplus · Accepted Answer

When managers are authorized to trade contracts to hedge, they may also engage in speculative behavior, which could result in losses for the firm. Speculation involves taking on additional risk with the goal of generating higher returns, but it can also lead to significant losses. Therefore, authorizing managers to trade contracts creates the possibility of speculation. The other choices, such as expectation profit, risk premium, and free cash flows, are not directly related to the authorization of managers to trade contracts.

When a Firm Authorizes Managers to Trade Contracts to Hedge,it