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An industrial-level farmer based in Asia produces a crop that is sold on the world markets

Questions and AnswersPosted On:2023-07-31 22:32:39Viewed:101

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, your advice is conditional on. Your answer should be between 2-4 paragraphs. A paragraph is normally 4-6 sentences and deals with a specific idea or theme.

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Last updated on:2023-07-31 22:32:39

When an owner sells all of the shares he does not hold at the point of sale, this is known as short selling. In brief, an investor purchases stocks from the owner and trades them at the present market price in the belief that prices would rise. The main reason you might desire to sell commodities is to profit on a dropping market value. This indicates that there would be more trading chances under volatile market situations. When the price drops, the seller purchases the shares and profits. Short Selling, on the other hand, has a greater risk to return ratio, and investors can either win or lose a lot of money from it.

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A writer  is the vendor of an option who creates a position in order to receive a premium from the purchaser. Writers can sell covered or unprotected call or put options.


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