Answer: Should buy put options on buffalo futures

## Explanation **Understanding the farmer's position:** - The farmer owns buffalo (long position in the underlying asset) - He is concerned about price declines (downside risk) **Hedging strategy for price protection:** - To protect against price declines when you own the underlying asset, you need downside protection - **Buying put options** gives the right to sell at a predetermined price (strike price) - If prices fall below the strike price, the farmer can exercise the put option and sell at the higher strike price - If prices rise, the farmer can let the option expire and benefit from the higher market price **Why other options are incorrect:** - **Buying call options**: Protects against price increases when you need to buy the asset (not relevant here) - **Selling put options**: Creates obligation to buy at strike price if exercised (increases risk) - **Selling call options**: Creates obligation to sell at strike price if exercised (limits upside) Therefore, the farmer should buy put options on buffalo futures to protect against price declines.

Author: LeetQuiz .