Advise tom on how he can hedge his risk of fluctuations

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Question - Tom Sweet, a melon farmer, has asked you to advise him on how he can protect himself against an adverse price movement regarding the sale of his melons using futures contract.  He expects to have 1,500 tonnes of melon for sale in the summer.  It is now early January and the cash price for melons is $350 per tonne.  The settle price on a futures contract to sell melons in June is $330 per tonne.

Required - Advise Tom on how he can hedge his risk of fluctuations using the futures market and demonstrate the calculation of Tom's resulting gain or loss if the cash price for melons is

a) $300 per tonne in June and the settle price on a futures contract to buy melons is $320 per tonne.

b) $360 per tonne in June and the settle price on a futures contact to buy melons is $380 per tonne.

Reference no: EM133159455

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