You Are a Baker and Need to Purchase a Substantial

question 34

Multiple Choice

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 the above

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Definitions:

Maturity Date

The date on which a financial obligation or investment becomes due for payment.

American Calls

Options contracts that allow the buyer to exercise the option to buy the underlying asset at the strike price at any time before expiration.

Option Expiration

The date on which an options contract becomes void and the holder no longer has rights for which it provides.