Hedging with Futures Suppose today is 4 March, your firm produces chocolate and needs 75,000 tonnes of cocoa in July for an upcoming promotion. The July cocoa futures price is £1,450 per contract of 1,000 tonnes. You would like to lock in your costs today, because you are concerned that cocoa prices might go up between now and July.

(a) How could you use cocoa futures contracts to hedge your risk exposure? What price would you effectively be locking in, based on the closing price of the day?

(b) Suppose cocoa prices are £1,500 per contract in July.

What is the profit or loss on your futures position?

Explain how your futures position has eliminated your exposure to price risk in the cocoa market.