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FRM Part I · FRM Exam Part I · Using Futures for Hedging

A jewelry manufacturer expects to buy gold in three months and wants to remove the risk of a price rise. Which futures position is appropriate, and what is it called?

The manufacturer should take a long futures position, called a long hedge. Because it will buy gold later, it loses when prices rise, and a long futures position gains in that case, offsetting the higher purchase cost.

  1. AShort futures position; a short hedge
  2. BLong futures position; a long hedgeCorrect
  3. CShort futures position; a long hedge
  4. DLong futures position; a short hedge

Explanation

A firm that will need to buy an asset in the future is exposed to rising prices. Buying futures gains when prices rise, offsetting the higher purchase cost. This is a long hedge. A short position would add to the risk.

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