FRM Part I · FRM Exam Part I · Futures Markets
A jet fuel buyer is worried that fuel prices will rise before a purchase planned for three months from now. Which futures position would hedge this exposure, and what is the name given to it?
The buyer should take a long futures position, called a long hedge. If fuel prices rise, the gain on the long futures offsets the higher cost of the planned purchase. A short position would lose when prices rise and so would increase the exposure.
- AShort futures position; a short hedge
- BLong futures position; a long hedgeCorrect
- CShort futures position; a long hedge
- DLong futures position; a short hedge
Explanation
A party who will buy an asset later is exposed to a price rise. Buying (going long) futures gains when prices rise, offsetting the higher purchase cost. This is called a long hedge. A short position would lose money if prices rose, adding to the risk.
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