Suspected mistake of Example 12.5 of FRM handbook (5th edition)

[Liming]

Dear David,

I suspect that FRM handbook (5th edition）made a mistake in the answer provided to Example 12.5 on page 306. The question asks what the hedging strategy using futures contracts should be for a bronze producer who will sell bronze in three months and the answer provided by the book is to " b. to buy 25 futures". But I think the correct answer should be "d. to sell 25 futures" because the producer should be shorting futures to gain profits in case that bronze price declines, not going long.

Can you kindly confirm this? Thanks

Cheers!
Liming

1/11/2009

 

[David Harper CFA FRM]

Hi Liming,

Yes, you are *definitely* correct and the given answer is incorrect: the future seller must short hedge (short the futures contract)
if the bronze producer enters a long futures contract, then a price decrease will product (i) a loss on the future sale and (ii) a loss on the long futures. Long futures is *not* the hedge here.
...I will definitely add this to the list, so that it will go to their attention
...thanks!

David