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Answer: All of the statements are accurate, except Barbara's
## 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.
Author: Manit Arora
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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?
A
Only Donald and Erin are accurate
B
Only Albert, Chris, and Fred are accurate
C
All of the statements are accurate, except Barbara's
D
All of the statements are accurate, except Fred's