What must happen to prices over the course of a contract for the seller of a futures contract to maximize benefits of the hedge?
A) Prices must decrease.
B) Prices must increase.
C) Prices must remain constant.
D) The seller will profit on the hedge regardless of the direction of price movements.

Question

Quizplus · Accepted Answer

In order for the seller of a futures contract to maximize their benefits of the hedge, prices must decrease. This is because the seller is essentially locking in a sale price for the underlying asset, and if the market price decreases, the seller can sell the asset at the higher futures price, thus making a profit on the futures contract. If prices increase, the seller will be obligated to sell the asset at a lower futures price, resulting in a loss on the futures contract.

What Must Happen to Prices Over the Course of a Contract