Multiple choice general knowledge

Hedging involves:

  1. taking a futures position opposite to one's cash market position.

  2. taking a futures position identical to one's cash market position.

  3. holding only a futures market position.

  4. holding only a cash market position.

  5. none of the above.
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A Correct answer
Explanation

Hedging involves taking a futures position opposite to one's cash market position to offset price risk. For example, a farmer with wheat to sell (long cash position) would sell wheat futures (short futures position). If prices fall, the loss in the cash market is offset by gains in the futures position, reducing overall risk.

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