a. Suppose it is start of January 202X. A cocoa farmer would be looking to sell 45,000 tonnes of cocoa in early March. Consider the following contracts and quotes: Required (show all step-by-step calculations for each part):

i. How could this farmer hedge the sale of cocoa in early March? How many contracts should he use? What total contract price would he be locking in for March contract?

ii. Suppose spot cocoa price is £1,764 per tonne (and per contract) in early March. What is the profit or loss on the farmer’s futures position?

iii. Explain how the futures position has mitigated the farmer’s exposure to price risk in the cocoa market. (maximum word count 150) [15 + 7 + 8 = 30 marks]

b. An American investor is looking to buy 1000 shares of Swiss International Airlines in about six months. The shares are currently trading at CHF950 each. She does not want to take any currency risk over the next six months. The spot exchange rate is $0.7254/CHF whereas the six-month futures exchange rate is $0.7250/CHF. Each futures contract is for CHF125,000. Required (show all step-by-step calculations for each part):

i. If the share price stays at the same level in six months as it is today, what should be the strategy of the investor to hedge currency risk?

ii. How many contract should she use? TURN OVER 2

iii. Suppose, she is ready to buy the stocks in five months. Determine the overall performance of the hedge by evaluating the position of the investor if in five-month time the share price drops to CHF926.50, the then spot exchange rate is $0.7301/CHF, and the futures exchange rate for the same contract is $0.7295/CHF. [15 + 8 + 22 = 45 marks]

c. Evaluate the statement that “Firms should concentrate on their business and need not hedge their systematic/unsystematic risks, because risks can be best managed by the shareholders of the firms.” (maximum word count: 200) [25 marks] Total [30 + 45 + 25 = 100 marks]

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SOFTS ICOCOA LIFFE (10 tonnes: £/tonne) Sett Day's price change High Low 000s 000s Vol O int Mar May Jul Sep Dec Mar Total 1808 1764 1751 1735 1681 1649 -28 1855 1802 5.89 72.86 -24 1805 1757 1.56 38.61 18 1780 1748 0.24 30.99 -13 1755 1733 1.02 11.42 -13 1705 1679 0.66 14.31 -20 1677 1649 0.68 1.40 10.1 169.6 SOFTS ICOCOA LIFFE (10 tonnes: £/tonne) Sett Day's price change High Low 000s 000s Vol O int Mar May Jul Sep Dec Mar Total 1808 1764 1751 1735 1681 1649 -28 1855 1802 5.89 72.86 -24 1805 1757 1.56 38.61 18 1780 1748 0.24 30.99 -13 1755 1733 1.02 11.42 -13 1705 1679 0.66 14.31 -20 1677 1649 0.68 1.40 10.1 169.6