Difference in Hedging Strategies Using Futures Contracts

Medium Derivative Strategies Futures And Forwards

A financial analyst is evaluating two companies, Company A and Company B, that are involved in the commodities market. Company A wishes to hedge against potential price increases in crude oil, while Company B is interested in locking in the current price to protect against potential price declines.

To achieve these objectives, Company A decides to enter into a long crude oil futures contract, while Company B enters into a short crude oil futures contract. Both companies expect their respective hedging strategies to be effective in controlling risk.

What is the primary difference between the hedging strategies used by Company A and Company B?

Company A is protecting against price increases, while Company B is protecting against price decreases.

Both companies are using futures contracts in the same manner, resulting in identical risk management strategies.

Company A faces unlimited downside risk, while Company B is fully protected from increasing prices.

Hint

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