You are a baker and need to purchase a substantial amount of wheat flour three months from now in preparation for your busy season. Your concern is that the price of wheat will increase substantially before you make your purchase. Which one of the following positions in wheat would be an effective hedge for you?
A) long position in spot market
B) short position in spot market
C) long position in futures market
D) short position in futures market
E) none of the above

Question

Quizplus · Accepted Answer

A long position in futures market would be an effective hedge for the baker because it allows them to lock in a price for the wheat flour three months ahead of time, protecting them from any potential price increases in the spot market. This way, the baker can secure the necessary amount of wheat flour at a predetermined price, which helps manage their cost of goods sold during the busy season.

You Are a Baker and Need to Purchase a Substantial