Steve needs to buy 4,600 kg of fine wool in May 2022. He believes today's spot price of $18.10 / kg, will persist until May, but he notes that the futures market for fine wool is pricing in an expected fall:

Delivery Date Settlement Price

March 2022 $17.85 / kg

June 2022 $17.65 / kg

December 2022 $17.60 / kg

Today is December 20^th 2021 and Steve decides to take advantage of the lower futures prices relative to his expectations and with reasonable certainty, lock in a price that he considers is a 'bargain'. 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 May 2022 if spot, June 2022 and December 2022 futures prices are $18.00, $17.90 and $17.80 respectively,

[Fine wool contract size is 2500 kg.]

Date of activity	Futures market activity	Physical market activity
Dec 20th 2022
November
December

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