You are a coffee anticipating the purchase of 82000 pounds

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Reference no: EM13381817

You are a coffee anticipating the purchase of 82,000 pounds of coffee in three months. You are concerned that the price of coffee will rise, so you take a long position in coffee futures. Each contract covers 37,500 pounds and so, rounding to the nearest contract, you decide to go long in two contracts. The futures price at the time you initiate your hedge is 60 cents per pound. Three months later, the actual spot price of coffee turns out to be 65 cents per pound and the futures price is 70 cents per pound.

Determine the effective price at which you purchased your coffee. How do you account for the difference in amounts for the spot and hedge positions?

Reference no: EM13381817

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