A farmer who grows soy beans can hedge against the risk that bad weather will damage her crop by
A)buying soy bean futures for delivery near the time of harvest.
B)selling soy bean futures for delivery near the time of harvest.
C)buying contracts in alternative crops for delivery near the time of harvest.
D)buying contracts in unrelated commodities for delivery near the time of harvest.

Question

Quizplus · Accepted Answer

By buying soy bean futures for delivery near the time of harvest, the farmer can lock in a price for her crop before it is affected by bad weather. If the weather is bad, the price of soy beans on the market will likely increase, but the farmer will still be able to sell at the higher locked-in price. This protects the farmer from the risk of decreased revenue due to weather-related crop damage. The other choices do not provide a direct hedge against the risk of bad weather affecting the soy bean crop.

A Farmer Who Grows Soy Beans Can Hedge Against the Risk