A baker of bread has a long-term fixed-price contract to supply bread. Which of the following would NOT reduce her risk?
A) Taking the long position in wheat futures contract
B) Hedging this risk in the wheat futures market
C) Finding a wheat farmer who will take the short position in a wheat futures contract
D) Finding a wheat farmer who will take the long position in a wheat futures contract

Question

Quizplus · Accepted Answer

Taking the long position in wheat futures contract or hedging this risk in the wheat futures market would both help to reduce the baker's risk by locking in the price of wheat. Finding a wheat farmer who will take the short position in a wheat futures contract may also help to reduce the risk, but finding a wheat farmer who will take the long position in a wheat futures contract would not reduce the baker's risk as it would not provide any price protection.

A Baker of Bread Has a Long-Term Fixed-Price Contract to Supply