Question: Question 2 Risk can be divided into two types, namely systematic risk and unsystematic risk. The former is risk due to price movement and is

Question 2 Risk can be divided into two types, namely systematic

Question 2 Risk can be divided into two types, namely systematic risk and unsystematic risk. The former is risk due to price movement and is market-related and it can be mitigated by hedging. Hedging is an effort to protect or minimize the potential loss resulting from adverse price movement when making a commitment in a cash market. It acts as an insurance, to ascertain that the loss due to the price movement can be covered. a a) Explain why a trader has to hedge. (2 Marks) b) State TWO (2) significant elements when a hedger goes into a derivative market. (2 Marks) c) Explain TWO (2) advantages of hedging to a trader. (4 Marks) d) What is a short hedge? Who should adopt this short hedge strategy? Give an example. (3 Marks) a (Total: 11 Marks) Question 3

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