Explanation:
A company that produces a commodity (such as oil) and uses futures contracts to lock in the selling price is engaging in hedging. By selling oil futures, Blackoil Inc. mitigates the risk of financial loss if oil prices fall before they are ready to sell their physical oil in the spot market. This effectively stabilizes their expected revenues.
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Q.28 Blackoil Inc. is an American oil-producing company that regularly sells oil futures to reduce the risk of fluctuating oil prices. This activity can be described as:
A
Speculating
B
Hedging
C
Clearing
D
None of the above
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