It is October 12th and you are the head of risk management of Barstucks Coffee Company. You are needing to purchase 7,500,000 pounds of coffee at the end of December. To protect yourself against adverse movements in the coffee price, you have decided to hedge your price risk through coffee futures with a contract price of $106. Given this information and the information provided in the tables above, answer the following questions:

1. How would you use these futures contracts to protect the total cost of Barstucks coffee purchase? In providing your answer, show that your strategy works if the coffee price at the end of December is $90 $115.

Trading Units Tick Size Quoted Units Contract Specifications: KC, ICE Futures 37,500 pounds 0.05cwt = $18.75 (point value = $3.75) US $ per pound Initial Margin Maintenance Margin Contract Months Last Trading Day Trading Hours Delivery Daily Limit $6,300 $4,500 Mar, May, Jul, Sep, Dec One business day prior to last notice day 1.30am - 3.15pm (NY time) Physical None Closing KC Futures Prices (expiration December 2020) Price Open High Low Date Vol. Change % Oct 12, 2020 109.15 111.00 113.35 108.55 15.91K -2.15% Oct 13, 2020 110.10 109.30 111.15 108.70 14.79K 0.87% 109.60 110.05 111.70 109.20 14.05K -0.45% 109.50 109.55 111.35 106.50 22.36K -0.09% Oct 14, 2020 Oct 15, 2020 Oct 16, 2020 Oct 19, 2020 107.25 109.65 111.10 106.85 14.72K -2.05% 106.05 106.55 108.65 105.60 16.87K -1.12% Oct 20, 2020 104.90 107.05 107.25 104.00 17.97K -1.08% Trading Units Tick Size Quoted Units Contract Specifications: KC, ICE Futures 37,500 pounds 0.05cwt = $18.75 (point value = $3.75) US $ per pound Initial Margin Maintenance Margin Contract Months Last Trading Day Trading Hours Delivery Daily Limit $6,300 $4,500 Mar, May, Jul, Sep, Dec One business day prior to last notice day 1.30am - 3.15pm (NY time) Physical None Closing KC Futures Prices (expiration December 2020) Price Open High Low Date Vol. Change % Oct 12, 2020 109.15 111.00 113.35 108.55 15.91K -2.15% Oct 13, 2020 110.10 109.30 111.15 108.70 14.79K 0.87% 109.60 110.05 111.70 109.20 14.05K -0.45% 109.50 109.55 111.35 106.50 22.36K -0.09% Oct 14, 2020 Oct 15, 2020 Oct 16, 2020 Oct 19, 2020 107.25 109.65 111.10 106.85 14.72K -2.05% 106.05 106.55 108.65 105.60 16.87K -1.12% Oct 20, 2020 104.90 107.05 107.25 104.00 17.97K -1.08%