What must happen to prices over the course of a contract for the seller of a futures contract to maximize the 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

The seller of a futures contract is typically someone who already owns the underlying asset and wants to guarantee a certain price for it in the future. If prices decrease, the seller can sell the asset at the higher price agreed upon in the futures contract, thus maximizing their benefits from hedging. If prices increase, the seller will still have to sell at the lower price agreed upon in the futures contract, which means they would have been better off not hedging in the first place. Therefore, the best choice for the seller to maximize benefits would be for prices to decrease.

What Must Happen to Prices Over the Course of a Contract