A derivative contract is transacted between a hedger and a speculator. What is the impact of the transaction on the risk profile of these two parties?
A)It increases the risk to both parties.
B)It decreases risk in both cases.
C)It increases risk of the hedger and decreases risk of the speculator.
D)It reduces the risk of the hedger and increases the risk of the speculator.

Question

Quizplus · Accepted Answer

The hedger uses the derivative contract to reduce their risk exposure to an underlying asset, while the speculator takes on risk in hopes of making a profit. Therefore, the derivative contract reduces the risk of the hedger and increases the risk of the speculator.

A Derivative Contract Is Transacted Between a Hedger and a Speculator