6. a. a. b. A cocoa merchant holds current inventory of cocoa grade No.2 worth $10...

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6. a. a. b. A cocoa merchant holds current inventory of cocoa grade No.2 worth $10 million at present price of $1,250 per metric ton. She is considering hedging her exposure by using cocoa futures contracts traded on the Coffee, Cocoa and Sugar Exchange. However, there are no contracts available on cocoa grade No.2. The only available contracts are on cocoa grade No. 1. She estimates the following equation ASt = a + ß AFt + &t Where St is the spot price of cocoa grade No.2 and Ft is the futures price of cocoa grade No.1. Her estimation gives the following results α = 0.5232 B=0.6955 R² = 0.88 Interpret ß and R² in detail with reference to the estimation of this equation (5 points) How should the merchant hedge her position? Explain with size and type of contracts. (5 points) 6. a. a. b. A cocoa merchant holds current inventory of cocoa grade No.2 worth $10 million at present price of $1,250 per metric ton. She is considering hedging her exposure by using cocoa futures contracts traded on the Coffee, Cocoa and Sugar Exchange. However, there are no contracts available on cocoa grade No.2. The only available contracts are on cocoa grade No. 1. She estimates the following equation ASt = a + ß AFt + &t Where St is the spot price of cocoa grade No.2 and Ft is the futures price of cocoa grade No.1. Her estimation gives the following results α = 0.5232 B=0.6955 R² = 0.88 Interpret ß and R² in detail with reference to the estimation of this equation (5 points) How should the merchant hedge her position? Explain with size and type of contracts. (5 points)

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Cocoa Merchant Hedge Analysis a Interpretation of Coefficients 06955 This coefficient represents the change in the spot price of cocoa grade No2 S for ... View the full answer