A hedger buys a futures contract that obligates the owner to take delivery of 5,000 bushels of wheat at a price of $6.75 per bushel. At expiration the spot price of wheat is $6.80 per bushel. The hedger has:
A) saved $0.05 per bushel through hedging.
B) gained peace of mind at a price of $0.05 per bushel.
C) the opportunity to avoid taking delivery since the price increased.
D)locked in an effective price of $6.80 per bushel.

Question

Quizplus · Accepted Answer

By buying the futures contract, the hedger has locked in a price of $6.75 per bushel. However, at expiration, the spot price of wheat increased to $6.80 per bushel. By taking delivery at the lower contracted price of $6.75 per bushel, the hedger has saved $0.05 per bushel through hedging.

A Hedger Buys a Futures Contract That Obligates the Owner