Answer (B) is correct . A change in prices can be minimized or avoided by hedging. Hedging is the process of using offsetting commitments to minimize or avoid the impact of adverse price movements. The automobile company desires to stabilize the price of steel so that its cost to the company will not rise and cut into profits. Accordingly, the automobile company uses the futures market to create a long hedge, which is a futures contract that is purchased to protect against price increases.
Answer (A) is incorrect because A short hedge is a futures contract that is sold to protect against price declines. The automobile company wishes to protect itself against price increases.
Answer (C) is incorrect because The automobile company needs to purchase futures in order to protect itself from loss, not sell futures. Selling futures protects against price declines.
Answer (D) is incorrect because It is the definition of a short hedge, which is used for avoiding price declines. The automobile company wants to protect itself against price increases.
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