A hedger who expects to sell a commodity in the future would typically take what futures position to lock in a selling price?

• A. Sell futures contracts
• B. Buy futures contracts
• C. Enter into a put option
• D. Enter into a call option

Answer: (A)

Hedging price risk with futures when you expect to sell later is done by taking a short position in futures. By selling futures contracts now, you lock in a price at which you expect to dispose of your commodity in the future. The futures market moves in the opposite direction of the cash price, so if cash prices fall, the gain on the short futures offsets the lower revenue from selling the commodity. If prices rise, you incur a loss on the futures, but you still benefit from a higher cash selling price, leaving you close to the intended locked-in price. This setup provides the price protection a producer aims for when planning a future sale. Other options, like put options, could provide a floor with a premium, while buying futures or using calls wouldn’t directly lock in a selling price for a future sale as effectively.