Which financial instrument is commonly used by farmers to hedge against price fluctuations?
Practice Questions
1 question
Q1
Which financial instrument is commonly used by farmers to hedge against 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, helping them hedge against price fluctuations in the market.
Questions & Step-by-step Solutions
1 item
Q
Q: Which financial instrument is commonly used by farmers to hedge against price fluctuations?
Solution: Futures contracts are financial instruments that allow farmers to lock in prices for their crops, helping them hedge against price fluctuations in the market.
Steps: 6
Step 1: Understand that farmers sell crops and their prices can change.
Step 2: Learn that price changes can affect how much money farmers make.
Step 3: Know that farmers want to protect themselves from losing money due to price drops.
Step 4: Discover that farmers can use a tool called a futures contract.
Step 5: A futures contract allows farmers to agree on a price for their crops before they are sold.
Step 6: By locking in a price, farmers can plan their finances better and reduce risk.
