Question : Hedging is possible in:
Option 1: spot market
Option 2: forward market
Option 3: managed floating system
Option 4: both (a) and (b)
Correct Answer: both (a) and (b)
Solution : The correct answer is d) both (a) and (b)
Hedging is possible in both the spot market and the forward market.
In the spot market, hedging involves entering into offsetting transactions to mitigate the risk of adverse price movements in the underlying asset. For example, a company may enter into a spot foreign exchange transaction to buy or sell a currency at the current exchange rate to hedge against potential exchange rate fluctuations.
In the forward market, hedging is commonly used to manage future price risks. Companies can enter into forward contracts, which are agreements to buy or sell an asset at a predetermined price on a future date. By entering into a forward contract, companies can lock in a future exchange rate to hedge against potential adverse currency movements.
Both the spot market and the forward market provide tools and mechanisms for market participants to hedge their risks and protect themselves from potential losses associated with price or exchange rate movements.
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