1. Hedging with futures contracts

Ghana Cocoa Board can hedge against falling cocoa price by employing a short hedge to lock-in a future selling price for the upcoming production season. To implement the short hedge, Cocobod shorts enough cocoa futures contracts in the futures market to cover the quantity of cocoa to be produced.

Suppose Cocobod has just entered into a contract to sell 1,000 tonnes of cocoa, to be delivered in 3 months. The sale price that has been agreed to by both parties is the market price of cocoa on the day of delivery.

1. Today, 3-month Cocoa Futures are selling at USD 2,400/ton. Cocobod will like to lock-in this price. What should they do? Explain clearly how your recommendation will work.

2. Of course, cocoa price can rise or fall.

Scenario 1: suppose Cocoa Spot Price Fell by 20% per ton on Delivery Date. On this date, the cocoa spot price and the futures price will be equal since each calls for immediate delivery of cocoa. Calculate how much Cocobod nets for each ton of cocoa. Explain clearly.