To curb what it perceives as destabilising speculation, the government of a developing nation abruptly bans all derivative transactions, including forward contracts, on agricultural commodities within its financial sector.
Which of the following is the most likely consequence of this policy on the role of financial markets in supporting the real economy?
Agricultural producers will experience greater cash-flow stability as speculative price distortions are permanently removed from the supply chain.
Commercial banks will lower interest rates on loans to agricultural businesses due to the elimination of derivative-related systemic risks.
Firms will lose the ability to hedge against commodity price fluctuations, resulting in greater investment uncertainty and a contraction in long-term capital expenditure.
The spot market will automatically clear at a highly stable equilibrium price, as transactions are forced to occur only on a physical, immediate-delivery basis.
