Question

The agricultural price support system guarantees farmers a minimum price for their output. Describe the program provisions as an option. What is the asset? The exercise price?

Short answer

Answer

The farmer can sell his produce (i.e. asset) at PS (i.e. exercise price) when the PM (i.e. market price of the asset) is lower than PS(i.e. exercise price). Crop is an asset.

Step-by-step solution

Definition

The agricultural price support system is a scheme run by the government to support the farmers earn basic minimum price of their product, if it is too low in the outside market.

Explanation of program provisions

The farmers can sell their produce to the government to earn the basic minimum price. In this case, the produce of the farmer i.e. crop is an asset.

In other words, the farmer can sell his produce (i.e. asset) at PS (i.e. exercise price) when the PM (i.e. market price of the asset) is lower than PS(i.e. exercise price).