Certified Supply Chain Professional (CSCP) Practice Exam

Which of the following is not a type of hedging?

1. Forward-customized deals between two parties

2. Futures-standardized deals offered by exchanges

3. Options-giving the right to buy or sell

4. Short selling-preventing future losses

The correct answer is: Short selling-preventing future losses

Short selling is not considered a type of hedging in the same way that forward contracts, futures, and options are. Hedging is typically a strategy employed to mitigate risk associated with price movements in the market. It involves taking a position in one market to offset potential losses in another market. Forward-customized deals, futures-standardized contracts, and options all serve the purpose of allowing an investor to manage or hedge their exposure to price fluctuations. Specifically, forward contracts and futures are agreements to purchase or sell an asset at a future date for a predetermined price, effectively locking in prices and reducing the gamble with market volatility. Options, on the other hand, provide the right but not the obligation to buy or sell, which also helps in managing potential losses. While short selling can be used as a speculative strategy to profit from a decline in asset prices, it does not inherently protect against losses in a traditional hedging sense. Instead, it carries its own risks and is more aligned with strategies aimed at capitalizing on market downturns rather than offsetting risk. This distinction is crucial in understanding the various strategies used in financial markets for managing risk and exposure.