Starbucks, the importer, is my client. Today, February 23, 2024, I call Starbucks and ask if they would like to purchase 37,500 pounds of coffee for December 2024 delivery. Starbucks agrees and we settle on a price of "Dec plus 2" (Dec + 2 or said another way, 2 cents over the December contract price.). Today, the December coffee futures contract is priced at 230.00. Fast forward into the future where for purposes of this scenario, assume that there are two days left in the December contract trading period and the price of the December 2024 coffee futures contract is now 20.00. I call Starbucks, and we agree to settle our business based on the new market price of 20.00 (not taking into consideration the 2-cent premium). Assume I did everything "by the book" in terms of my hedging strategy based on what we learned in class. The question is, why was this a good strategy on my part? In other words, what would have happened if I had never called Starbucks on February 23, 2024, and never considered using the coffee futures exchange to my advantage?

Answer rating: 100% (QA)

By using the coffee futures exchange and implementing a hedging strategy you engaged in a good strategy that protected you from potential price fluctu... View the full answer