Question

Why might ranchers want to lock in a price today for their cattle by signing a six-month futures contract?

Responses

A. To be able to sell all of their cattle for a profit a year from now.

B. To be able to buy a new herd of cattle when the six months is up.

C. To be able to pay off the put option when the futures contract expires.

D. To be able to plan on a certain amount of income in the future.

Answer 1

D. To be able to plan on a certain amount of income in the future.

Step-by-step explanation:

Locking in price is when a seller and buyer agree on the minimum price for a transaction in the future. A locked-in price remains unchanged for the agreed period.

By lock in prices for their cattle, the ranchers have set the cattle's selling price after six months. Changes in market conditions will not affect the price. The ranchers will focus on controlling their costs to attain their target income. Locking in prices guarantees selling of stable prices, which allows them to plan of expected income.