Choc Full of Good Inc., a producer of powdered hot chocolate, has just received a large order that will require the purchase of 800 metric tons of cocoa in 3 months. The current spot price of cocoa is US $3,055 per metric ton. The standard deviation of the change in spot cocoa price is 0.2. Mr. Dulce, the CFO of Choc Full, 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 standard deviation of the change in cocoa futures price is 0.25. The covariance between the change in the spot and futures cocoa price is 0.035. The annually compounded interest rate faced by the company is 5%, the three-month storage cost is $2.5 per metric ton, and the convenience yield is $0.5 per metric ton.
b. Should the company long or short cocoa futures? (1 mark)
As the cocoa will be purchased in 3 months, the risk is that price of cocoa will increase hence go long cocoa futures
Choc Full of Good Inc., a producer of powdered hot chocolate, has just received a large...
1. A cocoa merchant currently has a cocoa inventory worth approximately $10 million at current spot of $1840 per metric ton. Cocoa future trade on the coffee, cocoa and sugar exchange with contract size equal to 10 metric tons. Current price for a May contract is $1630 per metric ton. She would like to hedge with a minimum variance hedge ratio so she calculates some statistics. The standard deviation of return for her inventory is .27. the measured volatility of...