A chocolate company which uses the futures market to lock in the price of cocoa to protect a proﬁt is an example of:
A)A long hedge.
B)A short hedge.
C)Purchasing futures to guard against a potential loss.
D)Both A and C.
E)Both B and C.

Question

Quizplus · Accepted Answer

A long hedge involves buying futures contracts to lock in prices for commodities that a company needs in the future, protecting against price increases. This scenario describes a long hedge as the company is buying cocoa futures to secure a stable price, which is also purchasing futures to guard against potential loss.

A Chocolate Company Which Uses the Futures Market to Lock