Delroy Murray, a yam farmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale of his yams using futures contracts. He expects to have 1,500 tonnes of yam for sale in the summer. It is now early January and the cash price for yams is $350 per tonne. The settle price on a futures contract to sell yams in June is $330 per tonne.

Required:

Advise Delroy on how he can hedge his risk of fluctuations using the futures market and demonstrate the calculation of Delroys resulting gain or loss if the cash price for yams is

a) $300 per tonne in June and the settle price on a futures contract to buy yams is $320 per tonne.(4 marks)

b) $360 per tonne in June and the settle price on a futures contact to buy yams is $380 per tonne (4 marks)