- A put option is a derivative contract between two parties. The buyer of the put option earns a right (it is not an obligation) to exercise his option to sell a particular asset to the put option seller for a stipulated period of time. [1] The advantage of buying a put option is that the buyer of the put option can cancel it before its expiry date if the value of the asset increases to more than its original strike price, only the cost of the put option will be lost.
- A fixed price contract is an agreement with a fixed (final) price for a specific delivery requirement. This contract is also referred to as a “flat price” contract.[2] Although cost this type of contract is much cheaper than put options to conclude, the disadvantage of a fixed price contract is that a seller is required to deliver the specified crop grade, quantity at a specific date at the agreed price and there are hefty penalties if these requirements are not adhered to.
1. The Economic Times, (2022, January 12). Definition of ‘Put Option’. Retrieved from https://economictimes.indiatimes.com/definition/put-option
2. Northern Grain Growers, Grain Contracts, Price Contracts. Retrieved from https://www.nwgrgr.com/fccp-grain-contracts-20002#:~:text=A%20contract%20with%20a%20fixed,a%20%22flat%20price%22%20contract.
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