See File for questions.

Chococo Inc., a producer of powdered hot chocolate, has just received a large order that will require the purchase of 750 metric tons of cocoa in 3 months. The current spot price of cocoa is $2,645 per metric ton. The standard deviation of the value for the inventory is 0.15. Mr. Dulce, the CFO of the Chococo, is considering a minimum-variance hedge of this future cocoa purchase using the three-month cocoa futures contract. The contract size is 10 metric tons. The volatility of the futures is 0.2. The covariance between the change in the spot and futures cocoa price is 0.027.

1. Chococo Inc., a producer of powdered hot chocolate, has just received a large order that will require the purchase of 750 metric tons of cocoa in 3 months. The current spot price of cocoa is $2,645 per metric ton. The standard deviation of the value for the inventory is 0.15. Mr. Dulce, the CFO of the Chococo, is considering a minimum-variance hedge of this future cocoa purchase using the three-month cocoa futures contract. The contract size is 10 metric tons. The volatility of the futures is 0.2. The covariance between the change in the spot and futures cocoa price is 0.027. a. Compute the minimum-variance hedge ratio. (5 marks) b. How many contracts she should trade? Long or short? (3 marks) c. What is the estimated effectiveness of this minimum variance hedge? (2 marks)