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 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.

Explain step by step