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Which financial instrument is commonly used by farmers to hedge against crop pri
Which financial instrument is commonly used by farmers to hedge against crop price fluctuations?
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Practice Questions
1 question
Q1
Which financial instrument is commonly used by farmers to hedge against crop price fluctuations?
Futures contracts
Savings accounts
Equity shares
Government bonds
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Futures contracts are used by farmers to lock in prices for their crops, providing a hedge against price volatility in the market.
Questions & Step-by-step Solutions
1 item
Q
Q: Which financial instrument is commonly used by farmers to hedge against crop price fluctuations?
Solution:
Futures contracts are used by farmers to lock in prices for their crops, providing a hedge against price volatility in the market.
Steps: 6
Show Steps
Step 1: Understand that farmers grow crops and sell them for money.
Step 2: Know that the price of crops can change a lot, which can be risky for farmers.
Step 3: Learn that farmers want to protect themselves from these price changes.
Step 4: Discover that farmers use a tool called 'futures contracts' to help with this.
Step 5: Realize that a futures contract allows farmers to agree on a price for their crops before they are sold.
Step 6: Conclude that by using futures contracts, farmers can secure a price and reduce the risk of losing money if prices drop.
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