An industrial-level farmer based in Asia produces a crop that is sold on the world markets. Because the farmer is a small producer relative to global output, he cannot affect the crop's price and is therefore a price-taker. On the world markets, the crop's price is denominated in USD. More so, the farmer expects the crop's price to decline significantly by next season's harvest.

The farmer has some knowledge of international finance, and three ideas come to mind:

i)  He thinks about short-selling equity in companies that also produce this commodity,

ii)  He considers purchasing put options on this commodity, and

iii)  He considers writing (i.e., creating) a call option on this commodity.

Which of these strategies would you recommend? Your advice should be logical, coherent, and very specific. You should clearly identify the risk-return trade-offs of the strategy and specific under what conditions, if any.

Answer rating: 100% (QA)

Lets analyze each strategy in light of the farmers situation and the expected decline in crop prices i Shortselling equity in companies that produce t... View the full answer