Fall 2002
Q: In our Homework 7 set, there is a word 'short' in brackets in question 1and 'long' in question 2. The first one in question 1 - Short - is confusing making us think the farmer sold the put options rather than buying it.
A: The term "short" hedge or "long" hedge
refers to your futures position. When an option buyer notifies his/her
broker that he or she wants to exercise an option, the notice goes to the BOT
Clearing Corporation and the Clearing Corporation creates a new futures position
at the assigned (agreed upon) strike price. The buyer of a call option has
a long futures position; the buyer of a put option has a short futures
position. See CBOT, Agricultural Futures and Options p. 31-33.