Cereal Delites uses corn as the primary ingredient in their cereal. As a result, the firm has a down sloping risk profile which shows that it will suffer a financial loss if the price of corn rises. To offset this risk, the firm should _____ a forward contract on corn with a payoff profile that is _____.
A) buy; down sloping
B) buy; up sloping
C) buy; horizontal
D) sell; horizontal
E) sell; up sloping

Question

Quizplus · Accepted Answer

To offset the risk of financial loss if the price of corn rises, Cereal Delites should buy a forward contract on corn. This contract would have an up sloping payoff profile, meaning as the price of corn increases, the value of the forward contract also increases, offsetting the increased costs of corn.

Cereal Delites Uses Corn as the Primary Ingredient in Their