Midge feels that the price of gold is going to fall because inflation is on the decline. To profit from her prediction, assuming she is correct, Midge should
A) buy gold bullion today and then sell an equivalent amount of gold futures.
B) buy a gold futures contract today.
C) sell short a futures contract today.
D) sell short one futures contract and offset it by buying an equivalent long futures contract.

Question

Quizplus · Accepted Answer

Selling short a futures contract today allows Midge to profit from a decline in the price of gold. By selling a futures contract, Midge is obligated to sell gold at a predetermined price, which could be higher than the market price if the price of gold does fall. This means Midge could buy gold at the lower market price and sell it at the higher futures price, resulting in a profit. Buying gold bullion and then selling an equivalent amount of gold futures or buying a gold futures contract today would not necessarily guarantee profit if the price of gold falls. Selling short one futures contract and offsetting it by buying an equivalent long futures contract would also not guarantee profit if the price of gold falls, as the long contract would offset the potential gains from the short contract.

Midge Feels That the Price of Gold Is Going to Fall