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 $3.80 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 saved 50¢ per bushel through hedging because they locked in a price of $3.30 per bushel, while the spot price at expiration is $3.80 per bushel. This means they effectively pay 50¢ less per bushel than the market price at expiration.

A Hedger Buys a Futures Contract That Obligates the Owner