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Hello: Please explain: A wheat farmer plans to retire at the end of the growing season,...

Hello: Please explain:

A wheat farmer plans to retire at the end of the growing season, or about three months from now, and take up the leisure activity of fishing. The farmer would like to purchase a $20,000 fishing boat from selling his last crop of wheat. It's possible that when the wheat is harvested in three months that its price will be lower than it is today and the farmer would be unable to afford the boat. How can the farmer hedge his risk against a drop in wheat prices?

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Answer #1

The farmer should sell a futures contract which would allow him to sell his wheat to a buyer in three months at a price agreed upon today. The futures contract locks the farmer into a selling price today ensuring that, even if the price of wheat falls in three months, the farmer willbe able to buy a fishing boat.

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