QUESTION 3 (20 POINTS) Luxury Cotton ("Luxury"), an independent distributor of cotton, is planning to sell 4.5 million Ibs of cotton in May at the spot price on devivery day In order to hedge against a possible decline in cotton prices, Luxury wants to enter into a Futures contract and lock in the price of cotton (from ICE). The standard deviation of the change in the spot price per lb is calculated 0.038 The standard deviation of the change in the future price per lb is calculated 0.041 The coefficient of correlation between the price of cotton and change in the futures price is 0.85 a. Looking at the Future's Contract table above, how many contracts should Luxury optimize so that its exposure it's hedged for its May? b. After entering into the May contracts for 100% of it's delivery exposure, suppose that the only three possible prices for cotton in May is to stay at the same level, increase by 5 cents, decrease by 10 cents, show the profit and loss from the futures contracts as well as the total proceeds for Luxury