ohn Acorn, a pumpkin farmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale of his pumpkins using futures contracts. He expects to have 1,000 tonnes of pumpkins for sale in the summer. It is now early January and the cash price for pumpkins is $480 per tonne. The settle price on a futures contract to sell pumpkins in June is $450 per tonne.

Required:

Advise John on how he can hedge his risk of fluctuations using the futures market and demonstrate the calculation of Johns resulting gain or loss if the cash price of pumpkins is

a) $430 per tonne in June and the settle price on a futures contract to buy pumpkins is $420 per tonne. (4 marks)

b) $500 per tonne in June and the settle price on a futures contract to buy pumpkins is $490 per tonne. (4 marks)