A wine wholesaler needs 100,000 gallons of Cheap Chardonnay for delivery in Boston in June 2007. A producer offers to deliver the wine at that time for $500, 000 paid now, in December 2006. The wholesaler can also buy Cheap Chardonnay futures contracts for June 2007. The current futures price is $51, 000 for each 10,000 gallon futures contract. The wholesaler is determined to lock in the cost of the 100,000 gallons needed in June.

(a) The wholesaler considers the futures contract, but worries that the contract will not lock in her cost, because futures prices may fluctuate widely between now and June. Is her concern justified? Why or why not?

(b) Do you recommend that the wholesaler pay the producer now or take a long position in Chardonnay futures? (Additional assumptions may be needed to answer. Make sure they are reasonable.) Explain for full credit.