Please use a contract from April, May or June $2024$ futures contracts for parts $($a$)$ and $($b$).$

Download the futures chart on the day you complete this question.

$($Use the camera icon on $$Charts$$ to access this and then use $$save image$)$

$($a$)$ Suppose a trader wants to set up a short hedge using the futures contract selected.

Explain clearly any two $(2)$ reasons why hedging with futures contracts works less than

perfectly in practice.

$($b$)$ Explain what is meant by basis risk when futures contracts are used for hedging.

Using the same example as part $($a$),$ explain when a long hedge would be appropriate.

Using your own numerical example from the futures contract used, explain why a long

hedger$$s position worsens when the basis strengthens unexpectedly and improves when the

basis weakens unexpectedly.

NB: For this question, you would also need the $$spot$$ or $$cash$$ price.

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