Study Notes - Hedging with Futures. Question Clarificatin

[Kashif Khalid]

Hi there

Question 5 on page42 asks:

An oil producer has negotiated a contract to sell one million barrels of crude oil in 6 months. Which is the best hedge against changes in the spot price of oil?

a) short 1,000 futures
b) short 1m futures
c) long 1,000 futures
d) long 1m futures


the correct answer is A.

So I thought the producer has a short exposure and therefore the correct answer would be C. Can you kindly explain why he has a long exposure, is it because he holds the oil right now? If so, is the outcome of performing A not that he will be double short at maturity as he has to deliver the short 1,000 futures along with the initial contract he negotiated, or am I correct in thinking that at maturity of future he will close it out with a long?

Thanks

 

[Nicole Seaman]

Hello @Kashkha,

Here is the original forum link to that specific question: https://forum.bionicturtle.com/threads/l1-t3-151-long-and-short-hedges.4417/#post-11400. There is an explanation in the answer section.

This forum post may also help to answer your question: https://forum.bionicturtle.com/threads/t3-r12-c3-q5-why-selling-short.7228/#post-25731.

Nicole