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).

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 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.

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