Part II: Cocoa Hedge

Jershey, a chocolate candy manufacturer based in New Jersey, has decided to expand its production line. In order to launch their newest product in the market by January $20$th $($the $$Super Sweet Valentine Chocolate Cuddle"$),$ they need to purchases $100($metric$)$ tons of cocoa beans by January $5$th$.$ In order to protect against price increases, the company$$s buyer opened a futures position on October $1$st using the March $2012$ Cocoa futures $($the contract size is $10$ metric tons$).$ The cost objective for every ton of cocoa beans was $$2,500.$

What is Jershey$$s position in the cash market? What position did they open in the futures market? How many contracts should they trade if they want to have a full hedge? What if they wanted a $0\mathrm{.}5$ hedge ratio? $(4$ points$)$

On January $5$th the price of the March Cocoa futures contract used for the hedge is $$2,320/$ton$,$ and the cash price is $$220/$ton above futures. When the futures position was originally opened $($October $1$st$)$ the price of the March $2011$ contract was $$1,990.$ Assume that the chocolate manufacturer fully hedges his position in the futures market $($the hedge ratio is $1\mathrm{.}0).$ Use a T$-$account to calculate the gains $($losses$)$ in both the cash and the futures market, total profits$/$losses$,$ the differences in the basis, and the actual buying price on January $5$th$.(10$ points$)$

Now consider the case where the chocolate manufacturer decided to hedge only half of his cash position? Calculate the EHP and compare it with the above $($Part II $-2).$ In which situation would he be better off? Why? $(6$ points$)$