One of the drawbacks of using futures contracts to hedge is that managers in a firm may use the futures contracts to ________ and consequently increase the firm's risk rather than reducing it.
A)hedge
B)produce
C)speculate
D)increase managerial compensation
E)expand

Question

Quizplus · Accepted Answer

Hedging involves using futures contracts to offset potential losses from adverse price movements. However, if managers in a firm use futures contracts to speculate, they are essentially betting on price movements and increasing the firm's risk rather than reducing it. Speculating involves taking on additional risk in the hope of making a profit, which is not the goal of hedging.

One of the Drawbacks of Using Futures Contracts to Hedge