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Donovan King, a banana farmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale
Donovan King, a banana farmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale of his bananas using futures contracts. He expects to have 1,000 tonnes of bananas for sale in the summer. It is now early January and the cash price for bananas is $590 per tonne. The settle price on a futures contract to sell bananas in June is $576 per tonne. Required: Advise Donovan King on how he can hedge his risk of fluctuations using the futures market and demonstrate the calculation of Donovan's resulting gain or loss if the cash price of bananas is: a) $540 per tonne in June and the settle price on a futures contract to buy bananas is $550 per tonne.(4 marks) b) $615 per tonne in June and the settle price on a futures contract to buy bananas is $625 per tonne. (4 marks) Enter calculation and answers here
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