Question

Explain how farmers who normally use short hedges on their crops could logically use futures options on their crops, as well.

Answer 1

What is Future contract?
Future contract are standardized contract determined by exchange they are binding to sell and buy at a specific quantity at a specific price.

Option contract- It a aggrrement between buyer and seller and purchaser of a option right to buy.( it just like a insurance)

Futures and options is a valuable weapon for farmers to survive in a time when the prices of the crop is uncertain. Farmers usually buy future contract of a certain time period( say 3 months future contract) at a amount specified today, it will help the farmers to hedge the uncertainity regarding the prices in near future, they settle the prices today. so that farmers can't bear losses in future, is the prices of crops will certainty fall, they will receive a guarantee amount mention in that contract.

I hope this clear your doubt.

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