John Acorn, a pumpkinfarmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale of his pumpkinsusing futures contracts. He expects to have 1,000 tonnes of pumpkinsfor sale in the summer. It is now early Januaryand the cash price for pumpkinsis $480 per tonne. The settle price on a futures contract to sell pumpkinsin Juneis $450 per tonne.

Required:

Advise Johnon how he can hedge his risk of fluctuations using the futures market and demonstrate the calculation of John's resulting gain or loss if the cash price of pumpkinsis

a) $430 per tonne in Juneand the settle price on a futures contract to buy pumpkinsis $420 per tonne.

b) $500 per tonne in Juneand the settle price on a futures contract to buy pumpkinsis $490 per tonne.

Answer rating: 100% (QA)

Hedging Johns Pumpkin Risk with Futures John can use short futures contracts to hedge his risk again... View the full answer