Which financial instrument is commonly used to hedge against crop price fluctuations?
Practice Questions
1 question
Q1
Which financial instrument is commonly used to hedge against crop price fluctuations?
Futures contracts
Savings accounts
Equity shares
Government bonds
Futures contracts are financial instruments that allow farmers to lock in prices for their crops, protecting them against price volatility in the market.
Questions & Step-by-step Solutions
1 item
Q
Q: Which financial instrument is commonly used to hedge against crop price fluctuations?
Solution: Futures contracts are financial instruments that allow farmers to lock in prices for their crops, protecting them against price volatility in the market.
Steps: 6
Step 1: Understand that farmers sell crops and want to get a good price.
Step 2: Realize that crop prices can go up and down a lot.
Step 3: Learn that farmers can use financial tools to protect themselves from losing money if prices drop.
Step 4: Discover that one of these tools is called a 'futures contract.'
Step 5: Know that a futures contract lets farmers agree on a price for their crops before they are harvested.
Step 6: Understand that by using futures contracts, farmers can secure a price and avoid losses from price drops.
