Steve needs to buy 4,600 kg of fine wool in May 2022. He believes todays spot price
Question:
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 20th 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,
