• Assume that you are the financial manager of an agricultural company, which is auser (buyer) of water for input and production.

• Your company plans to use a significant amount of water during summer 2021 and predicts that there will be a significant increase in the prices of water due to anticipated droughts and shortage of water.

• Assume that your company cannot purchase water in the spot market in advance and there is no storage of water.

• There are currently futures contracts on Water traded in the CME Group (see link) www.cmegroup.com/waterfutures

• Answer the following question: Given the above information, discuss one example of hedging strategy using derivatives that can hedge against the risk of increase in water prices. Explain your hedging strategy including information on the derivatives contract (e.g., what derivatives contract and underlying), position (e.g., long or short), etc. as clear as possible.

  Note: Your hedging strategy should be based on derivatives only (not the spot market).