You have 50,000 pounds of cotton in storage. You don't want to sell the cotton today as you believe the price of cotton will be higher six months from now than what the markets currently predict. However, you also realize that the price could decline. Which one of the following would hedge your risk of owning the cotton for the next few months?
A)short futures position
B)long futures position
C)short spot position
D)long spot position
E)long futures position combined with a short spot position

Question

Quizplus · Accepted Answer

A short futures position allows you to lock in a price for selling your cotton in the future, hedging against the risk of a price decline.

You Have 50,000 Pounds of Cotton in Storage