Explanation:
C is correct. This is a classic case of cash flow mismatch due to margin calls.
A is incorrect. This scenario happened to Northern Rock in 2007.
B is incorrect. This scenario happened to LTCM in 1998.
D is incorrect. Both forwards and futures can be used to hedge commodities exposure, but both can cause liquidity risk when a cash flow mismatch is present.
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A
Negative public perception of emergency borrowing from the central bank can cause a bank run.
B
Positive feedback trading in illiquid instruments can cause excessive losses.
C
Hedging liabilities by rolling forward futures contracts may create cash flow mismatches.
D
Futures provide a better effective hedge for hedging commodities exposure than forwards.
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