Final answer:
To hedge against a possible decline in the commodity's cash price at delivery, a farmer should sell a futures contract to lock in a current price. Other options, such as buying a futures contract, exercising an option, or short-selling, are related to different scenarios or speculation strategies.
Step-by-step explanation:
If a farmer wants to hedge against a possible decline in the cash price at delivery, he should sell a futures contract. A futures contract allows the farmer to lock in a price for their commodity beforehand, which means if the cash price drops at the time of delivery, the farmer is still able to sell at the previously locked-in higher price. Conversely, if the farmer expects the price of the commodity to rise, he might choose to buy a futures contract to purchase the commodity at a lower price now and sell it at a higher price later.
Regarding the various options provided: option b, buying a futures contract, is what an individual would do if they are hedging against an increase in price. Option c, exercising an option, usually occurs when you have purchased an options contract and decide to utilize the right but not the obligation to buy or sell at a specific price; this doesn't directly answer the question of what action to take now. Option d, short-selling the commodity, is related to the financial market and typically involves borrowing and selling the commodity now with the hope of repurchasing it later at a lower price to make a profit.
Expectations of the future value of a currency can drive demand and supply in foreign exchange markets. In a similar way, the expectation of the future price of commodities impacts the decision on whether to sell or buy futures contracts. Many portfolio investment decisions are made to protect against fluctuations in exchange rates, similar to how farmers might hedge against price fluctuations for their commodities.
For the secondary questions, a decline in interest rates is most likely to occur with a rise in supply of funds in the financial market (Option c), while an increase in the quantity of loans made and received is likely to occur with both a rise in demand and a rise in supply (Options a and c).