1. On 31stJanuary 2012, a sheep farmer became concerned that by the time her 200 bale greasy wool (25,000 kg) crop was ready for delivery in April 2012 that the price would fall below $11.80 per kg - her break-even price. Given that one greasy wool contract is for 2,500 kg, show how the farmer can 'lock in' a profit for her business by entering and subsequently reversing a futures market position, if the April spot price fell to $11.50 per kg.
2. Martin's Mills is putting together a tender to supply 100,000 blankets to a major hotel chain. If successful, he will need to purchase 100,000kg of greasy wool in March 2012 to meet the order. Martin assesses his production costs at $8.00 per blanket, and each blanket uses 1 kg of wool. Further, he wishes to allow $2.00 per blanket for profit and contingencies, including the basis risk from hedging his wool purchase. What price should he tender, if he assumes a basis (S - F) of 20c/kg in March. Ignore the time value of money, and assume one contract is 2,500 kg.

Gracie's Grains has distributed a genetically modified grain that has been widely used by NSW wheat farmers. Gracie decides that before this evening's 'Four Corners' expos goes to air detailing the link with Deranged Baker Disorder, she should take up a position to profit from the imminent detrimental impact the news will have on NSW wheat prices, and positive impact on WA wheat prices.

i)If she is prepared to trade in 50 close-dated contracts (of 20 metric tonnes / contract) in each of the NSW and WA wheat futures, outline a possible strategy.

ii)Determine her profit or loss in both positions if both NSW and WA wheat futures prices decrease by exactly 20% immediately following the programme going to air.