A farmer can hedge the risk of downward movement in the price of the produce by:

Question

Quizplus · Accepted Answer

The best choice for a farmer to hedge against the risk of the price of produce going down is to buy a put option. This gives the farmer the right to sell the commodity at a set price, even if the market price falls. This protects the farmer from potential losses due to price decreases. Buying a call option (A) provides protection against price increases, selling a put option (B) could result in having to purchase the commodity at a higher price if the market falls, and buying a futures contract (D) requires the farmer to take physical delivery of the commodity.

A Farmer Can Hedge the Risk of Downward Movement in the Price