Lucas owns a large farming operation which encompasses over 5,000 acres of corn.The crop this year is abundant and will be ready for harvesting next month.Lucas likes the market prices today but expects the prices to decline over the next month as the supply of corn increases.Which one of the following positions should Lucas take to hedge his corn crop?
A)sell in the spot market today
B)buy in the spot market today
C)take a long futures position
D)take a short futures position
E)sell in the spot today and take a long position in the futures market

Question

Quizplus · Accepted Answer

Taking a short futures position will allow Lucas to offset any potential losses from a decline in market prices for corn. As the supply increases, the market price for corn may decrease, which would reduce the value of Lucas's corn crop. By taking a short futures position, Lucas can sell corn futures contracts at the current market price, locking in a fixed price for his corn crop even if market prices decline. This will help Lucas to hedge against any potential losses and protect his profits.

Lucas Owns a Large Farming Operation Which Encompasses Over 5,000