It is July 1 and franchised caf Glorious Pants has just signed a contract with an interstate coffee bean supplier, Gregarious Beans, to trial a flavour of genetically modified chilli coffee. The details of the contract are that in one month's time, on August 1, Glorious Pants are to take delivery of a large quantity of 700 kg of beans with the price to be determined at time of delivery.

Since there are no futures contracts available on these coffee beans, a financial advisor has recommended that the Glorious Pants use regular coffee beans futures contracts to hedge the contract's risk exposure even though the new chilli coffee beans are different and present a slightly different price risk.

The standard deviation of monthly changes in the price of chilli coffee beans in cents per kilogram is 2.4. The standard deviation of monthly changes in the futures price of regular coffee beans for the closest contract is 1.2. The correlation between the futures and spot price changes is 0.8. Each futures contract is for 100kg of regular coffee beans.

a)In order to create an optimal hedge the Glorious Pants should enter into ( long or short ) futures contracts.

b)Calculate the optimal number of coffee futures contracts required to hedge the risk exposure. Give your answer to the nearest whole number of contracts.

Optimal number of contracts =

c)This will guarantee the caf (a profit or loss) fixed price when paying for the coffee beans in a month's time.