uestion: Starbucks uses forward markets to hedge its future purchases of milk. a. Suppose that on January
Question:
uestion: Starbucks uses forward markets to hedge its future purchases of milk.\\na. Suppose that on January 1, 2023, Starbucks took a long position in a two-year\\nmilk forward (for delivery on January 1, 2025). If the spot price of milk was\\n$19.32 per pound, the risk-free rate was 2%, and the cost of storing milk was 5%\\n(both continuously compounded per year),
Starbucks uses forward markets to hedge its future purchases of milk.\\na. Suppose that on January 1, 2023, Starbucks took a long position in a two-year\\nmilk forward (for delivery on January 1, 2025). If the spot price of milk was\\n$19.32 per pound, the risk-free rate was 2%, and the cost of storing milk was 5%\\n(both continuously compounded per year), what was the arbitrage-free forward\\nprice that Starbucks agreed to pay?\\n2\\nb. Suppose Starbucks entered into the long two-year forward position at a delivery\\nprice of $22.22. On January 1, 2024, after one year had passed, the spot price of\\nmilk had fallen to $16.17 and the cost of storing milk had fallen to 4%. The risk-\\nfree rate remained at 2%. What was the value of Starbucks long forward position\\nwith one year remaining on the contract?
Expert Answer:
a To calculate the arbitragefree forward price that Starbucks agreed to pay we can use the formula f... View the full answer
