Explanation:
A firm that must buy the commodity in the future is exposed to a rise in the spot price, so it should use a long futures hedge.
If one copper futures contract represents 25,000 pounds, then:
So the best hedge is to long 40 futures contracts.
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Question 151.2 An industrial manufacturer will require the purchase of one million pounds of copper, as a raw material input, in four months. Which is the best hedge against the spot price of copper?
A
Short 40 futures contacts
B
Short 400 futures contracts
C
Long 40 futures contacts
D
Long 400 futures contracts