A client has asked you about hedging his production of soybean oil. He expects to sell 360,000 pounds of soybean oil in four months. Soybean oil contracts are available at 60,000 pounds per contract. How could he hedge his position?
A) Buy 6 contracts.
B) Sell 7 contracts.
C) Buy 7 contracts.
D) Sell 6 contracts.
E) None of the above.

Question

Quizplus · Accepted Answer

To hedge against the risk of soybean oil prices falling, the client should sell futures contracts. Since he expects to sell 360,000 pounds and each contract is for 60,000 pounds, he needs to sell 6 contracts (360,000 / 60,000 = 6). This way, if prices fall, the gain on the futures contracts will offset the loss on the physical soybean oil sales.

A Client Has Asked You About Hedging His Production of Soybean