Steve needs to buy 6,000 kg of fine wool in November 2021. He has made...
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Steve needs to buy 6,000 kg of fine wool in November 2021. He has made forward sales of yarn based on todays spot price of $14.80 / kg, however, if this rises above $16.25 by November, Steve will make a loss. The following fine wool contracts are available on the futures market:
Delivery Date Settlement Price
June 2021 $14.85 / kg
September 2021 $15.25 / kg
December 2021 $15.65 / kg
Today is June 5th, and Steve decides to hedge his position using futures. 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 November if spot and December futures prices are $16.00 and $16.20 respectively,
[Fine wool contract size is 2500 kg.]
b) Calculate his effective (hedged) cost per kilogram from selling fine wool in November.
Date of activity Futures market activity Physical market activity June 5th 2021 November December Date of activity Futures market activity Physical market activity June 5th 2021 November December
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b) Calculate his effective (hedged) cost per kilogram from selling fine wool in November.