Which one of the following four statements about hedging is INCORRECT?

Which one of the following four statements about hedging is INCORRECT?
A . Traders can hedge their risks by taking an appropriate position in the underlying instrument.
B . Traders can hedge their portfolio risks by taking a position in a different instrument.
C . For a fully hedged portfolio, any changes in markets prices will typically produce significant changes in the market value of the portfolio.
D . A large number of hedge positions is generally required to match the underlying transaction
completely.

View Answer

Answer: C

Explanation:

A fully hedged portfolio is designed to minimize or eliminate the impact of market price changes on the portfolio’s value.

Here are the correct and incorrect statements about hedging:

Correct Statements:

Traders can hedge their risks by taking an appropriate position in the underlying instrument.

Traders can hedge their portfolio risks by taking a position in a different instrument.

A large number of hedge positions is generally required to match the underlying transaction completely.

Incorrect Statement:

For a fully hedged portfolio, any changes in market prices will typically produce significant changes in the market value of the portfolio.

This statement is incorrect because the purpose of hedging is to protect the portfolio from market price changes, hence reducing the impact of such changes on the portfolio’s value.

References Source: How Finance Works?