Steve needs to buy 4,600 kg of fine wool in November 2021. He has made forward sales of yarn based on todays spot price of $16.80 / kg, however, if this rises above $16.25 by November, Steve will make a loss. The following fine wool contracts are available on the futures market:

Delivery Date Settlement Price

June 2021 $16.85 / kg

September 2021 $17.25 / kg

December 2021 $17.65 / kg

Today is June 5^th, and Steve decides to hedge his position using futures. Assume that he can enter futures contracts at the settlement price.

a) Use the grid below to clearly specify:

i) the action he should take today,

ii) the action he should take in November if spot and December futures prices are $18.00 and $18.20 respectively,

[Fine wool contract size is 2500 kg.]

b) Calculate his effective (hedged) cost per kilogram from selling fine wool in November.

\begin{tabular}{|l|l|l|} \hline Date of activity & Futures market activity & Physical market activity \\ \hline June 5th2021 & & \\ \hline November & & \\ \hline December & & \\ \hline & & \\ \hline \end{tabular} \begin{tabular}{|l|l|l|} \hline Date of activity & Futures market activity & Physical market activity \\ \hline June 5th2021 & & \\ \hline November & & \\ \hline December & & \\ \hline & & \\ \hline \end{tabular}