A farmer wants the right, but not the obligation, to sell a futures contract for a commodity at a specified price level would use a:

A farmer wants the right, but not the obligation, to sell a futures contract for a commodity at a specified price level would use a:

• A. Put option
• B. Call option
• C. Futures contract
• D. Forward contract

Answer: (A)

The main idea is using an option to provide downside protection without an obligation. A put option on a futures contract gives the holder the right, but not the obligation, to sell the futures at a specified price (the strike price) within a set time. For a farmer wanting to lock in a minimum selling price, this is ideal: if market prices fall, the farmer can exercise the put to sell at the higher strike, effectively setting a floor on revenue. If prices rise, the option may expire unused, and the farmer still benefits from the higher market price for the actual commodity, paying only the option premium for this protection. The other choices don’t fit because a call option would allow buying, not selling; a futures contract involves an obligation to fulfill the contract; and a forward contract is also an obligation with no optionality.

The main idea is using an option to provide downside protection without an obligation. A put option on a futures contract gives the holder the right, but not the obligation, to sell the futures at a specified price (the strike price) within a set time. For a farmer wanting to lock in a minimum selling price, this is ideal: if market prices fall, the farmer can exercise the put to sell at the higher strike, effectively setting a floor on revenue. If prices rise, the option may expire unused, and the farmer still benefits from the higher market price for the actual commodity, paying only the option premium for this protection. The other choices don’t fit because a call option would allow buying, not selling; a futures contract involves an obligation to fulfill the contract; and a forward contract is also an obligation with no optionality.