Suppose today is 16 April 2015, and your firm produces chocolate and needs 75,000 tonnes of cocoa in July 2015 for an upcoming promotion. You would like to lock in your costs today because you are concerned that cocoa prices might go up between now and June. The closing price for July 2015 futures is £1,468 per ton of cocoa. 

(a) How could you use cocoa futures contracts to hedge your risk exposure?

(b) Suppose cocoa prices are £1,500 per contract in July. What is the profit or loss on your futures position? Explain how your futures position has eliminated your exposure to price risk in the cocoa market.

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Solution a How could you use cocoa futures contract to hedge your risk exposure Answer we can buy ... View the full answer