A Hedger Buys a Futures Contract That Obligates the Owner

question 112

Multiple Choice

A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:

• A)saved 50¢ per bushel through hedging.
• B)gained peace of mind at a price of 50¢ per bushel.
• C)the opportunity to avoid taking delivery, since price declined.
• D)locked in an effective price of $3.05 per bushel.

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Definitions:

Bicycle

A human-powered, pedal-driven vehicle with two wheels attached to a frame, one behind the other.

Complements

Pairs of goods for which a rise in the price of one good leads to a decrease in the demand for the other good.

Cross-Price Elasticity

A measure of how the quantity demanded of one good responds to a change in price of another good, indicating whether the goods are substitutes or complements.

Demand

The total quantity of a good or service that consumers are willing and able to purchase at a given price level.