A private banking client who has never used derivatives asks her adviser who trades futures and why, when some participants appear to be shedding price risk while others seem willing to take it on. WHICH STATEMENTS ARE CORRECT?I. A wheat farmer who will harvest and sell grain in three months can hedge by selling wheat futures, so that if grain prices fall, the lower proceeds on the planned physical sale are offset by a gain on the short futures position.II. A speculator who expects the broad stock market to fall can sell index futures, and because only a margin deposit is required rather than the full contract value, leverage magnifies both the potential percentage gain and the potential percentage loss on the position.III. A hedger takes a futures position in the same direction as the exposure in the underlying asset, so that a price movement affects the underlying holding and the futures position in the same way.IV. An arbitrageur takes futures positions primarily to profit from correctly forecasting the future direction of market prices, accepting open price risk in the same manner as a speculator.
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