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    Peruvian organic coffee price

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    Assume that in 4 months the cost of a pound of Peruvian organic coffee will be either $2.5 or $4.5. The current price is $3.5 per pound.

    (a) What are the risks faced by a coffee chain who is a large purchaser of coffee?

    (b) What are the risks faced by a Peruvian coffee farmer?

    (c) If the delivery price of coffee turns out to be $4.5, should the farmer have forgone entering into a futures contract? Why or why not?

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    Solution Preview

    (a) First of all the coffee chain faces the risk that the price at which it purchases coffee will rise. However the coffee chain can also pass along these costs to the consumers of the coffee, so it is not clear to what extent the coffee chain will be affected by an increase ...