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Hedging and Insurance

Note whether the following are ways to avoid losses through hedging or insuring:

Lock in a $979.00 fare home for the holidays.

Purchase a put option on a stock you do own.

Agree to purchase a house in one year for a fixed price of $200,000.

Lease a car with an option to purchase it in three years.

Enter into a swap contract to exchange fixed interest payments for floating-rate payments because you have floating-rate assets.

As a wheat grower, enter into a forward contract to sell your wheat in two months at a fixed price set today.

Pay a premium for catastrophic health care coverage.

Pay for a credit guarantee on a loan you are worried about collecting.

Solution Preview

Lock in a $979.00 fare home for the holidays. - Hedging

purchase a put option on a stock you do own. - Insurance

Agree to purchase a house in one year for a fixed ...

Solution Summary

The solution goes into a great amount of detail related to hedging and insurances. The response does an very good job of responding to the questions being asked and provide clear and concise answers to the problem. This is a great response for students looking to better understand the difference between hedging and insurance.

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