1. Cofarm is a coffee export firm. The firm expects to produce 5000kg of coffee in 6 months. It wants to hedge its coffee selling price using futures. The cost for producing a kilogram of coffee is $20. The spot and 6 month futures price of coffee are $45 and $46 dollar. Draw the payoff diagrams after hedging the price. You should include the underlying position, futures position and the final position. (6 marks)

2. b) What is the payoff if gold price surges to 55 at maturity of the futures contract? What if coffee price drops to 40? (6 marks)