Question20 Which of the following are reasons why it is usually not possible to perfectly hedge a position using futures contracts? A. Futures prices may include a premium or discount due to market expectations, making it difficult to lock in a perfect hedgeB. A cross-commodity hedge may be required when no futures contract exists for the exact underlying asset, introducing basis riskC. The size or maturity of available futures contracts may not perfectly match the hedger’s exposureD. Futures markets are influenced by speculators, who drive prices away from fundamental value A, B A, B, C B, C, D B, D A, B, C, D ResetMaximum marks: 0.59 Flag question undefined单项选择题
A
A, B
B
A, B, C
C
B, C, D
D
B, D
E
A, B, C, D

Question

Question20 Which of the following are reasons why it is usually not possible to perfectly hedge a position using futures contracts? A. Futures prices may include a premium or discount due to market expectations, making it difficult to lock in a perfect hedgeB. A cross-commodity hedge may be required when no futures contract exists for the exact underlying asset, introducing basis riskC. The size or maturity of available futures contracts may not perfectly match the hedger’s exposureD. Futures markets are influenced by speculators, who drive prices away from fundamental value A, B A, B, C B, C, D B, D A, B, C, D ResetMaximum marks: 0.59 Flag question undefined单项选择题

A

A, B

B

A, B, C

C

B, C, D

D

B, D

E

A, B, C, D

BlackTom AI · Accepted Answer

Let’s break down the four statements to assess whether each describes a reason why hedging with futures is not perfectly precise.
Option A: 'Futures prices may include a premium or discount due to market expectations, making it difficult to lock in a perfect hedge.' This captures the idea that futures prices can deviate from the fair value of the underlying asset because market expectations (like interest rates, storage costs, convenience yields) induce a premium or discount. Such mispricing relative to the exact exposure creates a hedging error, since the hedge relies on the futures price moving in lockstep with the spot exposure. Therefore, this is a valid reason.
Option B: 'A cross-commodity hedge may be required when no futures contract exists for the exact underlying asset, introducing basis risk.' When there is no perfect futures contract for the exact asset, a hedger must use a substitute or cross-hedge, which introduces basis risk—the difference between movements in the hedge instrument and the hedged exposure. This is indeed a reason why a perfect hedge is often unattainable. Thus this option is valid.
Option C: 'The size or maturity of available futures contracts may not perfectly match the hedger’s exposure.' If the contract’s unit size is larger or smaller than the exposure, or if the maturity dates don’t align with when the exposure occurs, a residual risk remains after hedging. This mismatch is a classic source of hedging error, so this is a valid reason.
Option D: 'Futures markets are influenced by speculators, who drive prices away from fundamental value.' While speculative activity can affect short-term price levels and volatility, the core reason a perfect hedge is hard to achieve is not simply that prices wander away from fundamentals. Some speculation helps with price discovery, and hedges can still be implemented using the available futures. However, speculative influence can contribute to basis risk and imperfect hedges in practice, so this statement can be considered a contributing factor to hedging imperfection, though perhaps less central than the others. Hence it is still a plausible reason rather than an outright incorrect one.
In summary, each of the four statements identifies a mechanism by which a hedge using futures may be imperfect: mispricing of futures relative to the intended exposure, lack of a perfect hedging instrument (cross-hedge), contract size/maturity mismatches, and speculative-driven price movements that affect hedging effectiveness. Collectively, they describe common sources of hedge imperfectness rather than a single, isolated cause.

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A farmer is has harvested their corn and the current spot price is $4.25 per bushel. They decide to short one March corn future at $4.50. Which of the following is true

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