Harold will need to buy 205 metric tonnes of sorghum in June 2020. He believes...
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Harold will need to buy 205 metric tonnes of sorghum in June 2020. He believes that the price is likely to fall, but worries that an increase might reduce the profitability of his Sorghum Beer brewery. He observes that todays spot price is $368.50 / tonne, while the following futures prices are available on January 2020 (today):
Delivery date Contract price
March 2020 $365.00/tonne
May 2020 $355.00/tonne
July 2020 $350.00/tonne
September 2020 $360.00/tonne
One contract is for 20 metric tonnes of sorghum.
Describe how Harold should hedge his position.
If in June, the spot price was $370.00/tonne and July and September futures were $368.00/tonne and $378/tonne respectively, what price did Harold effectively pay (hedged price) per tonne to acquire sorghum.
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