Case Study, "Futures Markets"

QUESTION 1: Enter into a futures contract

Following the email from the CEO you have logged on to the GG Futures Exchange (GGFE) website to obtain the coffee futures (COF) price and the GG Commodities Exchange (PCE) to obtain the current coffee spot price (COS).

Today's date is 10 May 2006

a) From the information provided below, choose the appropriate futures contract to hedge your exposure and indicate in the space provided:

b) Calculate the optimal number of contracts.

QUESTION 2: Check on your futures contract
Three months have passed since you originally entered into the coffee futures contracts. In the last three months market forces have caused the price of coffee and futures contracts in coffee to change.

Today's date is 10 August 2007

Below shows the current market conditions for coffee. This information can be used to determine the current position of the outstanding futures contracts.

a) Calculate whether a profit or loss is currently being made on the futures contracts and calculate the total size of this profit or loss. Give your answer in dollars and cents to the nearest cent.

b) Are any margin calls required?

QUESTION 3: Close out your futures contract
It is now 3 months later and the coffee festival has arrived! It is now 6 months since you entered into the original futures contracts and so it is time to reverse out of them. Before you reverse out, you decide to calculate the effects of your hedging.

Today's date is 10 November 2007

a) From the table below, choose the appropriate closing futures contract and indicate in the space provided:

b) Select whether a profit or loss was made on the futures contract and calculate the size of this profit or loss. Give your answer in dollars and cents to the nearest cent.

c) What price has the company effectively paid for the coffee per kg? Give your answer in cents to the nearest hundredth of a cent.

d) Compare your effective price and indicate if futures contract should have been really utilised?

For case study information and tables please see attachment.

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Case Study
Glorious Pants is a chain of coffee houses spreading rapidly throughout the country. As the Chief Financial Officer (CFO) of Glorious Pants you realise that the purchase of coffee beans is one of your largest (and often most volatile) expenses.

The marketing department of Glorious Pants is planning a week-long 'coffee extravaganza'. The coffee extravaganza will be a public event and will allow people to try out different flavours and buy coffee at a large discount to regular prices.

As a result of the coffee extravaganza there will be a once-off larger than normal demand for coffee beans in six months time. The Chief Executive Officer (CEO) has sent you an email about the order for the extra coffee beans:

"Hi Julia,
What do you think we should do about the 70,000 kg order of coffee beans that we will need in 6 months time? I want to protect us from any price rises over the next 6 months, but I don't want to pay any money for the ability to do that. I don't mind if the price falls in the next six months and we miss out on a saving, I am only worried about a price rise. Julia, what do you suggest we do?
Regards,
Martha "

You tell Martha that you could achieve this aim by entering into a coffee futures contract. Martha asks you to go ahead and organise the futures contracts required.

QUESTION 1: Enter into a futures contract

Following the email from the CEO you have logged on to the GG Futures Exchange (GGFE) website to obtain the coffee futures (COF) price and the GG Commodities Exchange (PCE) to obtain the current coffee spot price (COS).

Today's date is 10 May 2006

a) From the information provided below, choose the appropriate futures contract to hedge your exposure and indicate in the space provided:

GG Futures Exchange (GGFE)
Commodity Expiry Prices (cents per kg) Initial
margin ($) Maintenance
margin ($)
Bid (short) Ask (long)
COF July 2007 113.51 113.59 4,000 3,600
COF September 2007 114.27 114.35 4,000 3,600
COF November 2007 115.04 115.12 4,000 3,600
COF January 2007 115.81 115.89 4,000 3,600
Standard Contract Size = 13,000kg
Spot Market
Commodity Price
Coffee 111.76c per kg
Bond Market
Type of bond Current yield
10 year government bond 4.00%

b) Calculate the optimal number of contracts.

QUESTION 2: Check on your futures contract
Three months have passed since you originally entered into the coffee futures contracts. In the last three months market forces have caused the price of coffee and futures contracts in coffee to change.

Today's date is 10 August 2007

Below shows the current market conditions for coffee. This information can be used to determine the current position of the outstanding futures contracts.

GG Futures Exchange (GGFE)
Commodity Expiry Settlement Price
(cents per kg) Initial margin
per contract ($) Maintenance margin
per contract ($)
COF September 2007 111.10 4,000 3,600
COF November 2007 111.75 4,000 3,600
COF January 2007 112.40 4,000 3,600
COF March 2007 113.06 4,000 3,600
Standard Contract Size = 13,000kg
Spot Market
Commodity Price
Coffee 109.39c per kg
Bond Market
Type of bond Current yield
10 year government bond 3.50%

a) Calculate whether a profit or loss is currently being made on the futures contracts and calculate the total size of this profit or loss. Give your answer in dollars and cents to the nearest cent.

b) Are any margin calls required?

QUESTION 3: Close out your futures contract
It is now 3 months later and the coffee festival has arrived! It is now 6 months since you entered into the original futures contracts and so it is time to reverse out of them. Before you reverse out, you decide to calculate the effects of your hedging.

Today's date is 10 November 2007

a) From the table below, choose the appropriate closing futures contract and indicate in the space provided:

GG Futures Exchange (GGFE)
Commodity Expiry Prices (cents per kg) Initial
margin ($) Maintenance
margin ($)
Bid (short) Ask (long)
COF November 2007 106.99 107.05 4,000 3,600
COF January 2007 109.48 109.54 4,000 3,600
COF March 2007 110.21 110.27 4,000 3,600
COF May 2007 110.95 111.01 4,000 3,600
Standard Contract Size = 13,000kg
Spot Market
Commodity Price
Coffee 107.02c per kg
Bond Market
Type of bond Current yield
10 year government bond 4.00%

b) Select whether a profit or loss was made on the futures contract and calculate the size of this profit or loss. Give your answer in dollars and cents to the nearest cent.

c) What price has the company effectively paid for the coffee per kg? Give your answer in cents to the nearest hundredth of a cent.

d) Compare your effective price and indicate if futures contract should have been really utilised?