Suppose Starbucks has an inventory of about 1,600,000 pounds of coffee, valued at $1.3per pound. Starbucks fears that the price of coffee will fall in the short run and wants to protect the value of its inventory. The finance manager of Starbucks is aware that:

• There is a coffee futures contract at the New York Board of Trade.

• Each contract is for 37,500 pounds of coffee.

• Coffee futures price with three month expiration is $1.38 per pound.

Over the next month, the price of coffee falls. Starbucks sells its inventory for $1.2 per pound. The futures price also falls, to $1.29.

How did this short hedge perform?

Answer rating: 100% (QA)

To evaluate how the short hedge performed we need to compare the actual selling price of Starbucks inventory with the net price obtained through the s... View the full answer