A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $3.30 per bushel.At expiration the spot price of wheat is $2.80 per bushel.The hedger has:
A)saved 50¢ per bushel through hedging.
B)gained peace of mind at a price of 50¢ per bushel.
C)the opportunity to avoid taking delivery, since price declined.
D)locked in an effective price of $3.05 per bushel.

Question

Quizplus · Accepted Answer

The hedger has gained peace of mind by locking in a price through hedging, even though it turned out to be higher than the spot price at expiration. This is because the purpose of hedging is to reduce uncertainty about future prices, not necessarily to guarantee the best price.

A Hedger Buys a Futures Contract That Obligates the Owner