Question 1 (a) Appraise any three (3) risks that a wheat farmer faces. (25 marks)...
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Question 1
(a) Appraise any three (3) risks that a wheat farmer faces. (25 marks)
(b) Suppose the farmer expects to harvest about 1,000,000 bushels of wheat. Worried that the price of wheat may fall, he hedges by selling 200 futures contracts (Contract size for wheat is 5,000 bushels) at a contract price of $6 per bushel. However, due to poor weather conditions, the farmer manages to harvest only 800,000 bushels. Meanwhile the poor wheat harvest has caused the price to rise to $7 per bushel. Discuss the overall loss or gain for the farmer. (10 marks)
(c) Appraise the risks, if any, that the farmer did not take into account and what are the considerations for any actions he could he have undertaken? (15 marks)
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