Consider a potato farmer whose cost of production is $2.25 a bushel.In May,she expects that the potato when harvested in July will sell for either $2 a bushel or $3.00.She could avoid the probability of a loss by contracting to deliver the potatoes in July at $2.50.Such a contract is traded in a
A) futures market.
B) spot market.
C) portfolio market.
D) diversified market.

Question

Quizplus · Accepted Answer

A futures market allows the farmer to hedge against the uncertain price of potatoes by securing a contract to sell at a fixed price in the future. This way, the farmer is protected against potential losses if the price drops below the cost of production. A spot market is for immediate delivery, and a portfolio market and diversified market are not relevant in this scenario.

Consider a Potato Farmer Whose Cost of Production Is $2