A Clothes Producer Hedges Its Future Cotton Purchases by Buying

A clothes producer hedges its future cotton purchases by buying cotton futures.The futures contract provides the producer with 50,000 pounds of cotton at a price of $0.80 per pound.By contract expiration the producer finds that cotton prices have declined to $0.73 per pound.As a result of the futures contracts,the producer will:

A) lose $3,500 per contract in the futures market which offsets gains in the cash market.
B) gain $3,500 per contract in the futures market which offsets losses in the cash market.
C) lose $3,500 per contract in the futures market and suffer an opportunity cost in the cash market.
D) gain $3,500 per contract in the futures market and gain $0.07 per pound in the cash market.

Correct Answer:

Verified

Unlock this answer now
Get Access to more Verified Answers free of charge

Access For Free