Question

last box's option to choose from are (Delivery, Currency Depreciation, or Inflation)

Problem 15-02 You are a coffee dealer anticipating the purchase of 87,000 pounds of coffee in three months. You are concerned that the price of coffee will rise, so you take a long position in coffee futures. Each contract covers 39,500 pounds, and so, rounding to the nearest contract, you decide to go long in two contracts. The futures price at the time you initiate your hedge is 57.00 cents per pound. Three months later, the actual spot price of coffee turns out to be 58.66 cents per pound and the futures price is 60,20 cents per pound. Determine the effective price at which you purchased your coffee. Do not round Intermediate calculations. Round your answer to two decimal places. cents per pound How do you account for the difference in amounts for the spot and hedge positions? The difference in price between spot and future is probably due to Select costs

Answer 1

Ans.

Determine the effective price at which you purchased your coffee.

The cost of coffee is 58.66 cents per pound.

The cost of 2 contracts is 39,500 * 2 = 79,000 would cost 79,000 * (0.5866) = $ 46,341.40

The future profit will be 79,000 x ($ 0.6020 - $ 0.5700) = $2,528.

This Profit reduces the effective price to buy the coffee to $46,341.40 - $2,528 = $43,813.40.

So effective price per pound is  $43,813.40/79,000 = $ .5546.

So the effective price paid is  55.46 cents per pound.

We buy two contracts for 79,000 pounds at 57.00 cents per pound but (87000 - 79000) 8,000 pounds remain unhedged and therefore we can purchase them in the spot market for 58.66 cent per pound.

So , the effective price per pound is = (79,000 x 57.00 + 8,000 x 58.66)/87,000

= 4,972,280 / 87000 = 57.15 cents per pound.

How do you account for the difference in amounts for the spot and hedge positions

The difference in price between spot and future is probably due to delivery costs.