Question

It is now June and the Ghana Cocoa Board (GCB) estimates that this year it will be buying 40,000 tons of Cocoa during the crop harvest season which spans September to December. The current international market prices are as follows:

i. ii.

a. b.

Spot price is $840 per ton Future price is $915 per ton

Suppose that the spot price in September is $860 per ton, what is the hedging transaction for GCB?, analyze the results and advise accordingly.

Suppose that the spot price in December is $950 per ton, what is the hedging transaction for GCB?, analyze the results and advise accordingly.

Answer 1

i)

Forward hedge rate = $915 per ton

Spot rate in september = $860 per ton

Since GCB sold the cocoa at 915 and bought them back at 860 it is a profit for the company therefore

Profit per ton = 915 - 860 = 55

total benefit to the company = 55 x 40000

                                                    = 22,00,000

 

It resulted in profit for the company of 22,00,000 while using the hedge transaction

 

ii)

Forward hedge rate = $915 per ton

Spot rate in Decemenber = $950 per ton

Since GCB sold the cocoa at 950 and bought them back at 950 it is a loss for the company therefore

loss per ton = 915 - 950 = -35

total benefit to the company = -35 x 40000

                                                    = -14,00,000

 

It resulted in loss for the company of -14,00,000 while using the hedge transaction, since the period of hedge is over company shall book the loss for this transaction.