Due to a flood in Australia early April 2021, the productivity of oats declines in Australia in the early season of 2021 (August 1). A oat farmer expects to sell 100,000 kilograms of oats on 25 August. The September futures price for oats is currently AUD 220 per kilogram. The contract size is 2,500 kilograms of oats.

(a) Design a hedging strategy for this farmer using the September futures contract, if the farmer has to use a hedge ratio of 0.4 due to his financial difficulty during COVID-19.

(b) Using the concept of basis risk determine the outcome of the hedging strategy if the spot price on 25 August is AUD 230 per kilogram and the futures price is AUD 240 per kilogram.