The primary purpose of selling hog futures to hedge future hog sales is to

• A. Lock in a selling price and reduce price risk
• B. Speculate on price movements
• C. Earn guaranteed profit
• D. Avoid margin requirements

Answer: (A)

When producers hedge with hog futures, they are managing price risk by trying to lock in a selling price for a future sale. By taking a short position in futures contracts that match the timing of their planned hog sale, they create a price floor-and-ceiling effect: if cash prices fall, the gains on the futures position offset the lower cash price, so overall revenue is more predictable. If prices rise, they still benefit from selling their hogs at the higher cash price, but they don’t lose the upside entirely because the futures hedge isn’t perfect. This approach reduces price risk and stabilizes expected revenue, which is why it’s described as locking in a selling price and reducing price risk. It’s not about speculating on price movements, it doesn’t guarantee profit, and margins or margin requirements are a separate consideration in futures trading.