You are a baker and need to purchase a substantial amount of wheat flour three months from now in preparation for your busy season. Your concern is that the price of wheat will increase substantially before you make your purchase. Which one of the following positions in wheat would be an effective hedge for you?
A)long position in spot market
B)short position in spot market
C)long position in futures market
D)short position in futures market
E)none of these

Question

Quizplus · Accepted Answer

Taking a long position in the futures market allows the baker to lock in a price for wheat flour and protect against any price increases in the future. This is a common hedging strategy for businesses that rely on commodities for their operations. A short position in either the spot or futures market would not provide protection against a price increase.

You Are a Baker and Need to Purchase a Substantial