Question

What is the SPOT position of a wheat user/consumer like Pillsbury? What is the appropriate forward/futures position for Pillsbury to offset the cash market risk? Why? What option on a futures contract would provide a similar offset?

Answer 1

SPOT position of a wheat user/consumer like Pillsbury is done by either sale or purchase.

The appropriate forward/futures position for Pillsbury to offset the cash market risk will be done through by entering the opposite contract in-stead of earlier contract

[I.e if a trader wants to sale at spot and he expects price will decrease in future date then

He sale spot and he goes for long purchase the wheat

In Future market he will puechase at spot and sale in Future]

There are different option to offset the future contract

1. By entering into the Forward Contract

2. By entering into the hedging under mark to market risk

3. By offsetting the gain or loss on position