A firm provides a service that benefits from decreasing employment.This firm has a risk exposure to macro event.All other variables being equal,which of the following derivative securities is the firm most likely use to hedge its exposure?
A) Short position in an economic futures
B) Long position in an economic futures
C) Short position in an interest rate futures
D) Long position in an interest rate futures

Question

Quizplus · Accepted Answer

Since the firm benefits from decreasing employment, it is likely to be in the service of providing employment or job training. In times of macroeconomic events such as recession or high unemployment, the demand for the firm's services could decrease, leading to a decrease in revenue. To hedge against this risk exposure, the firm would want to take a long position in an economic futures contract. This would allow them to lock in a fixed price for their services and protect against any adverse changes in the market. A short position in an economic futures contract would amplify any losses the firm may face in a recession. The other two choices, short position in an interest rate futures and long position in an interest rate futures, are irrelevant to the firm's risk exposure to macro events.

A Firm Provides a Service That Benefits from Decreasing Employment