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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 protect against a rise in the price. Which futures position is appropriate, and what is this hedge called?

The manufacturer should take a long futures position, known as a long hedge. It will buy gold later and is harmed by rising prices, so gains on long futures offset the higher purchase cost. Short hedges are for parties who will sell the asset.

  1. AShort futures position; short hedge
  2. BLong futures position; long hedgeCorrect
  3. CLong futures position; short hedge
  4. DShort futures position; long hedge

Explanation

A company that will buy an asset in the future is exposed to price increases. A long futures position gains when prices rise and offsets the higher purchase cost. This is called a long hedge. A short hedge is used by those who will sell the asset.

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