Question
Carl Carter, a wheat farmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale
Carl Carter, a wheat farmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale of his wheat using a futures contract. He expects to have 1,000 tonnes of wheat for sale in the summer. It is now early January and the cash price for wheat is $305 per tonne. The settle price on a futures contract to sell wheat in June is $290 per tonne. Required: Advise Carl Carter on how he can hedge his risk of fluctuations using the futures market and demonstrate the calculation of Carls resulting total revenue if the cash price of wheat is:
a) $250 per tonne in June and the settle price on a futures contract to buy wheat is $270 per tonne (4 marks) b) $370 per tonne in June and the settle price on a futures contract to buy wheat is $390 per tonne (4 marks)
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