In the process of manufacturing cars, Mercedes Benz buys huge quantities of steel. As such, they are exposed to movements in the price of steel. They seek to hedge this exposure by entering a futures contract, where the underlying asset is steel. When the expiry date of these steel futures arrives, they close the futures position and realise a large loss on the futures trading. Which of the following best explains what has happened? Select one: If Mercedes Benz made a futures-trading loss, they must have entered the incorrect futures position when they initiated the hedge. It is normal that, sometimes when you hedge, you will make a loss on the future trading. This is likely to be offset by a futures-trading gain the next time you enter a hedge. Over the long run, these gains and losses tend to cancel each other out, which is the goal of hedging. The fact that they made a futures trading loss indicates that the price of steel must have fallen. The futures-trading loss will be offset by the fact that, when they purchase steel on the spot market, they get it at a lower price. Mercedes Benz should have been hedging their exposure rather than speculating on movements in the price of steel