Question

1. Electric utilities companies and coal mines agree to undertake a derivative transaction to reduce their risks. They form a good example of

____

1. Perfect hedge
2. Fair hedge
3. Natural hedge
4. Short hedge

2. An effective strategy for reducing operating costs is

____

1. Accessing new capital markets
2. Developing economies of vertical integration
3. Seeking risk reduction through international asset diversification
4. Following the customers

Answer 1

1) Ans ) D. Short Hedge

Short hedge is used by investor to protect himself from falling prices of the product he is going to sell in future. For example mining company might short iron futures so that in future the will be able to sell at fixed price irrespective of price movement

2) B. Develoing economies of veritcal integration

By developing companies that supplies products that main company need as raw material, cost for main company can be significanly reduce