Question
In July 2021, a sheep farmer became concerned that by the time she sells her crop of 19,500 kg of wool in November 2021 that
In July 2021, a sheep farmer became concerned that by the time she sells her crop of 19,500 kg of wool in November 2021 that the price would fall from its current $18.40 per kg to less than her $17.40 per kg break-even price. One wool contract is for 2,500 kg, and September and December wool futures prices are $17.90 and $17.70 respectively.
[6+2+2=10 marks]
i) Use the table below to show how the sheep farmer can 'lock in' a profit for her business by entering and subsequently reversing a futures market position, if in November, the spot and December futures prices are $18.30 per kg and $18.40 per kg respectively. Date of activity futures market activity physical market activity Specifically identify:
ii) Profit on futures: Overall (hedged) revenue from wool: iii) Effective (hedged) price per kilogram:
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