What price did the hog futures hedge begin at when the farmer sold December hog futures in March?

What price did the hog futures hedge begin at when the farmer sold December hog futures in March?

• A. $38.00
• B. $40.00
• C. $36.00
• D. $37.00

Answer: (B)

Hedging with futures locks in the price you’ll effectively use for your sale by taking a position in the futures market at the time you enter the hedge. When the farmer sells December hog futures in March, the starting price of the hedge is simply the futures price for December at that moment. If the December contract is trading at $40.00 in March, the hedge begins at $40.00. That price becomes the anchor for the hedge, and later cash prices will move around it; gains or losses on the futures position offset the risk from price changes in the actual hog sale. The other numbers would reflect different quotes that could have existed then, but the price you lock in is the futures price you sold at, which is $40.00 in this scenario.

Hedging with futures locks in the price you’ll effectively use for your sale by taking a position in the futures market at the time you enter the hedge. When the farmer sells December hog futures in March, the starting price of the hedge is simply the futures price for December at that moment. If the December contract is trading at $40.00 in March, the hedge begins at $40.00. That price becomes the anchor for the hedge, and later cash prices will move around it; gains or losses on the futures position offset the risk from price changes in the actual hog sale. The other numbers would reflect different quotes that could have existed then, but the price you lock in is the futures price you sold at, which is $40.00 in this scenario.