Financial Risk Manager Part 1

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Explanation:

Evaluation of the statements

Using the standard FRM definitions:

Short hedge: taking a short futures position to hedge an exposure to a future sale price.
Long hedge: taking a long futures position to hedge an exposure to a future purchase price.
A hedge can also be a cross-hedge if the futures contract is on a related but not identical asset.
The sign of the basis is not determined by whether the hedge is long or short; basis can be positive or negative depending on spot and futures prices.

Statement-by-statement

I. Albert — Accurate. A company that owns an asset and wants to hedge the sale price of that asset can use a short hedge.
II. Barbara — Inaccurate. If the company plans to sell the commodity in the future, a short hedge is appropriate, not a long hedge.
III. Chris — Inaccurate as written. The definition of a short hedge as taking a short futures position is correct, but the statement asserts that Barbara is correct, which is false.
IV. Donald — Accurate. A short hedge may also be a cross-hedge.
V. Erin — Accurate. The company does not need to currently own the asset to use a short hedge.
VI. Fred — Inaccurate. A short hedge does not imply negative basis, and a long hedge does not imply positive basis.

Conclusion

The accurate statements are I, IV, and V.

Note: None of the listed choices matches that combination exactly. If you must pick the closest available option, the source answer key appears to intend C, but strictly speaking the option set is inconsistent with the statement evaluation.

Explanation:

Evaluation of the statements

Using the standard FRM definitions:

Short hedge: taking a short futures position to hedge an exposure to a future sale price.
Long hedge: taking a long futures position to hedge an exposure to a future purchase price.
A hedge can also be a cross-hedge if the futures contract is on a related but not identical asset.
The sign of the basis is not determined by whether the hedge is long or short; basis can be positive or negative depending on spot and futures prices.

Statement-by-statement

I. Albert — Accurate. A company that owns an asset and wants to hedge the sale price of that asset can use a short hedge.
II. Barbara — Inaccurate. If the company plans to sell the commodity in the future, a short hedge is appropriate, not a long hedge.
III. Chris — Inaccurate as written. The definition of a short hedge as taking a short futures position is correct, but the statement asserts that Barbara is correct, which is false.
IV. Donald — Accurate. A short hedge may also be a cross-hedge.
V. Erin — Accurate. The company does not need to currently own the asset to use a short hedge.
VI. Fred — Inaccurate. A short hedge does not imply negative basis, and a long hedge does not imply positive basis.

Conclusion

The accurate statements are I, IV, and V.

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Q-710.1. You are meeting with your FRM study group when one of the members of the group says they are a bit unclear on the definition of the term "short hedge." The following conversation ensues:

I. Albert says, "It's simple, if a company owns an asset but wants to hedge its plan to sell the asset at the future spot price, a short hedge is appropriate"

II. Barbara says, "Yes, Albert, that is true, but if the company plans to sell the commodity it does not own currently in the future at a predetermined price, then a long hedge is appropriate!"

III. Chris says, "Barbara is correct because a short hedge is simply a hedge where a short futures position is taken."

IV. Donald says, "Exactly true, Chris. And that means that a short hedge can also be a cross-hedge; i.e., these terms are not mutually exclusive."

V. Erin says, "And I would like to add that the company does not need to own the asset in order to conduct a short hedge."

VI. Fred says, "And I would like to add that a short hedge implies negative basis, just as a long hedge implies positive basis."

Which of the statements is (are) accurate?

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MManit

Last updated: April 18, 2026 at 11:32

Only Donald and Erin are accurate

44.4%