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Which financial instrument is commonly used by farmers to hedge against price fl

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Question: Which financial instrument is commonly used by farmers to hedge against price fluctuations?

Options:

  1. Futures contracts
  2. Savings accounts
  3. Equity shares
  4. Government bonds

Correct Answer: Futures contracts

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.

Which financial instrument is commonly used by farmers to hedge against price fl

Practice Questions

Q1
Which financial instrument is commonly used by farmers to hedge against price fluctuations?
  1. Futures contracts
  2. Savings accounts
  3. Equity shares
  4. Government bonds

Questions & Step-by-Step Solutions

Which financial instrument is commonly used by farmers to hedge against price fluctuations?
Correct Answer: Futures contracts
  • 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.
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