A company which mines bauxite decides to short aluminum futures.This is an example of __________ to limit its risk.

Question

Quizplus · Accepted Answer

The company is using aluminum futures to offset the risk associated with mining bauxite. This is an example of cross hedging, where a company uses a futures contract in a different but correlated commodity to hedge the risk in their primary commodity. Long hedging is not applicable as the company is shorting the futures contract. Spreading involves taking a position in two or more futures contracts to take advantage of price differences, which is not the case here. Speculating involves taking a position in futures contracts to make a profit from price movements, which is not the company's intention here.

A Company Which Mines Bauxite Decides to Short Aluminum Futures