Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Charlies Chocolates PLC ('Charlies Chocolates') needs cocoa to make its chocolate products. The company expects to have to buy 10,000 tonnes of cocoa in
Charlies Chocolates PLC ('Charlies Chocolates') needs cocoa to make its chocolate products. The company expects to have to buy 10,000 tonnes of cocoa in December next year. However, the price of cocoa can be very volatile and the company is concerned about the risk of an increase in the price of cocoa between now and December. Consequently, Charlies Chocolates would like to find ways to buy the cocoa at a fixed price. The price for a futures contract for cocoa for delivery in December is 1,426 per tonne and the relevant contract calls for 10 tonnes. The current price of cocoa is 1,362 per tonne. Assume the open market price of cocoa in December will be 1,526 per tonne and ignore transaction costs and marking-to-market. Required: ii. iii. iv. If the company takes no action to hedge against the price risk, calculate the price Charlies Chocolates will have to pay in December for 10,000 tonnes of cocoa. Explain your workings. 10 Marks Assuming the company wishes to hedge against the price risk using futures contracts, calculate the net price Charlies Chocolates will pay in December for 10,000 tonnes of cocoa. Explain your workings. 10 Marks Explain the meaning of the term 'hedge' in this context. 10 Marks Explain how the use of a futures contract has eliminated the company's exposure to price risk. 10 Marks Explain the benefits of using a 'futures contract compared to a 'forward contract. 10 Marks
Step by Step Solution
★★★★★
3.41 Rating (160 Votes )
There are 3 Steps involved in it
Step: 1
i If the company takes no action to hedge against the price risk the price Charlies Chocolates will have to pay in December for 10000 tonnes of cocoa will be the open market price of 1526 per tonne Th...Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started