In general, when deciding whether a market participant needs to buy or sell futures contracts in order to hedge, the rule could be:
A) buy futures if you have the underlying asset and sell futures if you need the underlying asset.
B) sell futures if you have the underlying asset and buy futures if you need the underlying asset.
C) buy futures if you want to speculate, sell futures if you want to hedge.
D)buy futures if you are willing to have unlimited risk, sell futures if you want capped risk.

Question

Quizplus · Accepted Answer

Hedging is the practice of reducing or eliminating market risk by entering into a position that offsets an existing risk exposure. In the case of futures contracts, buying a futures contract is essentially agreeing to purchase the underlying asset at a future date at a specified price, while selling a futures contract is agreeing to sell the underlying asset at a future date at a specified price. When hedging, market participants should sell futures contracts if they currently hold the underlying asset and want to protect against price declines, as this will offset any losses from a price drop. Conversely, they should buy futures contracts if they don't currently hold the underlying asset but want to protect against price increases, as this will allow them to "lock in" a purchase price. Therefore, option B is the correct answer.

In General, When Deciding Whether a Market Participant Needs to Buy