A Client Has Asked You About Hedging His Production of Soybean

question 49

Multiple Choice

A client has asked you about hedging his production of soybean oil. He expects to sell 360,000 pounds of soybean oil in four months. Soybean oil contracts are available at 60,000 pounds per contract. How could he hedge his position?

• A) Buy 6 contracts.
• B) Sell 7 contracts.
• C) Buy 7 contracts.
• D) Sell 6 contracts.
• E) None of the above.

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Definitions:

Investment Project

A project that involves allocating resources like capital, manpower, and time with the expectation of generating future returns over the project’s lifespan.

Internal Rate Of Return

A financial metric used to evaluate the profitability of an investment, representing the interest rate where the net present value of all cash flows is zero.

Salvage Value

The calculated leftover value of an asset once it has reached the end of its service life.

Payback Period

The amount of time it takes for an investment to generate an amount of income or cash equivalent to the cost of the investment, used to evaluate the efficiency of an investment.