Commodity Futures Hedging Strategy Evaluation

Very Hard Commodities Investment Commodity Futures

A leading commodities investment firm is evaluating the use of commodity futures to manage the risks associated with price fluctuations in several agricultural products. They are particularly focused on utilizing futures contracts to hedge against anticipated adverse price movements. Consider the following information and scenarios:

The firm is currently holding a position in corn futures and is concerned about the impact of an expected increase in interest rates which may affect agricultural commodity prices. They have also received advice from a strategist suggesting that the firm should consider the roll yield impact that could stem from the difference in spot prices versus futures prices.

In this context, the firm is considering three potential strategies regarding the corn futures positions. Which strategy would most effectively utilize futures to hedge against the risk of increasing interest rates affecting corn prices?

Selling short to take advantage of a potential drop in spot prices due to rising interest rates.

Rolling over the futures contracts frequently to maintain a long position despite market fluctuations.

Entering into a long hedge by buying additional futures contracts to lock in current prices.

Hint

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