Luke owns a large farming operation which encompasses over 5,000 acres of corn.The crop this year is abundant and will be ready for harvesting next month.Luke likes the market prices today but expects the prices to decline over the next month as the supply of corn increases.Which one of the following positions should Luke take to hedge his corn crop?
A) sell in the spot market today
B) buy in the spot market today
C) take a long futures position
D) take a short futures position
E) sell in the spot today and take a long position in the futures market

Question

Quizplus · Accepted Answer

Luke should take a short futures position to hedge against the expected decline in market prices over the next month. By taking a short position, Luke is essentially locking in the current market price and protecting himself against any potential losses due to a decrease in price. This allows him to sell his crop at a predetermined price even if the market price drops over the next month. Selling in the spot market today or taking a long futures position would not be advisable in this scenario as they both expose Luke to potential market price decreases. Buying in the spot market today would also not make sense as he already owns the crop that will be harvested next month.

Luke Owns a Large Farming Operation Which Encompasses Over 5,000