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Managing Risk and Enhancing Returns: Kraft Foods Example

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In regards to Kraft Foods, discuss the use of derivatives as a means to manage risk and enhance returns. Discuss how options, forwards, and futures can be used to manage the risk of Kraft Foods.

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Managing Risk and Enhancing Returns: Kraft Foods Example

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We discuss how Kraft can use derivatives to manage risk (3 examples) and how they can use derivatives to enhance return (1 example).

1. Manage Risk.

What do you think Kraft needs to produce its products? Probably corn, sugar, wheat and so on. If I am the CEO of Kraft, obviously I want to plan the year and decide how many units of products I want to produce for the upcoming year. Hence I will need to know how much of each ingredient I will need. It turns out that all of these goods (corn, sugar etc.) are traded on the commodity market, and their prices change quickly. As the CEO, I probably want to be able to buy goods in a fixed price so that I can set the prices of products. Afterall the prices of Kraft cereals don't change very much (at ...

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