Due to COVID-19, the productivity of wheat declines in the U.S in the early season of 2020 (August 1). A U.S wheat farmer expects to sell 40,000 kilograms of wheat on 25 August. The September futures price for wheat is currently AUD 210 per kilogram. The contract size is 2,500 kilograms of wheat.

(a) Design a hedging strategy for this farmer using the September futures contract, if the farmer has to use a hedge ratio of 0.5 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 225 per kilogram and the futures price is AUD 235 per kilogram.