Question
In June 2020, a sheep farmer became concerned that by the time she sells her crop of 25,000 kg of wool in November 2020 that
In June 2020, a sheep farmer became concerned that by the time she sells her crop of 25,000 kg of wool in November 2020 that the price would fall from its current $11.50 per kg to less than her $10.00 per kg break-even price.One wool contract is for 2,500 kg, and June, September and December wool futures prices are $10.55, $10.90 and $10.70 respectively.
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 increase to $11.10 per kg and $11.20 per kg respectively.
Calculate:
i) The profit on futures trading.
ii) The overall (hedged) revenue from wool.
iii) The effective price per killogram.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started