Question

Which of the following statements is TRUE? A long position is taken in a forward or futures market by a hedger when:

Select one:

a. The hedger has a liability to pay in a foreign currency at a future date and wishes to fix the exchange rate today so that it does not lose from an increase in the exchange rate

b. The hedger needs to buy a certain amount of commodity for its manufacturing process at a future date and wants to lock in a price for the commodity today

c. The hedger has a natural short position in the underlying market variable

d. All of the above

Answer 1

The correct answer is All of the above

The hedger has short position in the market therefore to reduce the risk of the loss they take long position so that risk can be hedged. Therefore, Statement C is Correct

The Hedger also takes the position in forward or future market when they have to pay in foreign currency because the currency is subject to volatility which leads to price change, therefore, the hedger fixes the price by taking these positions so that risk can be reduced. Therefore, Statement A is correct.

The hedger can fix the price today if they think they would need to purchase any commodity, which will save him from the price risk.