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All main topics / Finance & Investment / Derivatives / Derivatives
119
A silver mining company has used futures markets to hedge the price it will receive for everything it will produce over the next 5 years. Which of the following is true?
A.It is liable to experience liquidity problems if the price of silver falls dramatically
B.It is liable to experience liquidity problems if the price of silver rises dramatically
C.It is liable to experience liquidity problems if the price of silver rises dramatically or falls dramatically
D.The operation of futures markets protects it from liquidity problems

Answer: B

The mining company shorts futures. It gains on the futures when the price decreases and loses when the price increases.  It may get margin calls which lead to liquidity problems when the price rises even though the silver in the ground is worth more.
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Flashcard info:
Author: CoboCards-User
Main topic: Finance & Investment
Topic: Derivatives
Published: 27.10.2015

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