Suppose your company is holding oil for delivery in three months and decides to hedge its position using futures. The purpose of this hedge is to offset a(n) _________ in the price of the oil by a(n) _________ in the value of the futures contract.
A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase
E) Insufficient information.

Question

Quizplus · Accepted Answer

The company is holding oil for delivery in three months, so it wants to protect itself from a potential decrease in the oil price. Therefore, it needs a hedge that will increase in value if the oil price decreases. The futures contract will serve as this hedge, and it will increase in value if the oil price decreases. Therefore, the answer is decrease; increase (D).

Suppose Your Company Is Holding Oil for Delivery in Three