Hedging is possible only when investments have:
A)Opposite payoff patterns
B)The same payoff patterns
C)Payoffs that are independent of each other
D)The same risk premiums

Question

Quizplus · Accepted Answer

Hedging involves taking a position in one investment to offset the potential losses in another investment with an opposite payoff pattern. Therefore, it is only possible when investments have opposite payoff patterns. When two investments have the same payoff pattern, hedging would not be effective as gains in one investment would be offset by losses in the other investment. Payoffs that are independent of each other or have the same risk premium do not necessarily indicate whether hedging is possible.

Hedging Is Possible Only When Investments Have