CFA Level I · CFA Level I Exam · Derivative Benefits, Risks, and Issuer and Investor Uses
A manufacturer wants to protect against a rise in the price of copper it will buy in nine months, and it wants the hedge to match its exact quantity and delivery date. The derivative market most appropriate for this need is the:
The over-the-counter forward market is most appropriate. OTC forwards can be customized to the exact quantity and delivery date the manufacturer needs, whereas exchange-traded futures and options have standardized contract sizes and expiration dates that would leave an imperfect hedge.
- Aexchange-traded futures market
- Bover-the-counter forward marketCorrect
- Cexchange-traded options market
Explanation
OTC forwards can be tailored to exact quantity, date and terms. Exchange-traded contracts have standardized sizes and expiries, so they would likely leave a mismatch (basis and quantity risk).
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