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Answer: Purchase a put option on the 3-month orange juice futures contract.
**B is correct.** Since the manager expects the price of oranges to keep going down, the manager could recommend a put option on the 3-month futures contract which will increase in price if the futures contract decreases in price before the forward contract matures (at which point the spot and futures prices should converge). The purchaser of a put option has the right, but not the obligation, to sell the underlying asset at the agreed upon strike price at the maturity date (European option) or at any point during an agreed upon period (American option). **A is incorrect.** The forward contract usually does not have a provision of cancellation; even in some cases it does, it shall come with a large penalty. **C is incorrect.** Although entering into another forward contract for oranges at a lower price could average the cost of the oranges from the futures contract, it is not the best hedging strategy for the price risk. In addition, increasing the delivery amount might result in a misalignment between the company's inventory 3 months from now and its sales and production plans at the time, potentially leading to some wasted inventory. **D is incorrect.** The manager could recommend entering a fixed-for-floating swap, not a floating-for-fixed swap.
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A trader at an agricultural commodity trading company is evaluating the risk of a potential continuous downward trend in orange juice prices. The trader notes that the trading company has entered into a forward contract to purchase a large volume of orange juice 3 months from now. Which of the following actions is most appropriate for the trader to recommend to hedge the risk of a potential decrease in orange juice prices?
A
Request a termination of the forward contract on orange juice prior to expiry.
B
Purchase a put option on the 3-month orange juice futures contract.
C
Enter into another forward contract on orange juice at a lower settlement price.
D
Enter into a floating-for-fixed swap on orange juice as the fixed-price payer.