Sin Jing a melon farmer has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale of his melons using a futures contracts. He expects to have 1,000 tonnes of melons for sale in the summer. It is now early January and the cash price for melon is $450 per tonne. The settle price on a futures contract to sell melon in June is $430 per tonne.

Required: Advise the farmer on how he can hedge his risk of fluctuations using the futures market and demonstrate the calculation of the farmers resulting total revenue if the cash price for melon is:

a) $520 per tonne in June, the settle price on a futures contract to buy melon is $400 per tonne (4 marks)

b) $585 per tonne in June, the settle price on a futures contract to buy melon is $465 per tonne