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Harold will need to buy 205 metric tonnes of sorghum in June 2020. He believes...

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Finance

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.

  1. Describe how Harold should hedge his position.
  2. 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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