Consider a producer who is in the business of producing Cocoa for future sale. At the time of 0 (i.e., present time), we have S(0) = $1652, F(0) = $1675. The firm is expecting to sell the Cocoa in 2 months, while the delivery date of the futures contract is 3 months away. Assume that the price of Cocoa in two months is unpredictable, but we know that the future price in two months will be $8 higher than the spot price of Cocoa in two months (i.e., F(t) = S(t) + $8).

Question 18. Without hedging, what is the firm's net profit at date t (i.e., in two months)?

Question 18 options:

A)

$23

B)

$8

C)

$31

D)

$15

E)	Cannot be determined.

What would be a good hedging strategy in order to minimize the commodity price risk that the firm faces (by utilizing futures contract)?

Question 19 option

What would be the net profit from the best hedging strategy that you can construct using the available future contracts mentioned in the question?

Question 19 options:

A)	At T= 0, the firm sells a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and buys the Cocoa in the spot market as planned.

B)	At T= 0, the firm sells a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and sells the Cocoa in the spot market as planned.

C)	At T= 0, the firm buys a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and buys the Cocoa in the spot market as planned.

D)	At T= 0, the firm buys a futures contract. And at T= t (i.e., in two months from today), the firm offsets the transaction in the futures market and sells the Cocoa in the spot market as planned.

E)	None of the above.

What would be the net profit from the best hedging strategy that you can construct using the available future contracts mentioned in the question?

Question 20 options:

A)	The net profit from the hedging strategy is -$12.

B)	The net profit from this hedging strategy is $12.

C)	The net profit from this hedging strategy is -$15.

D)	The net profit from this hedging strategy is $15.

E)	None of the above.