Stan Dover is a coffee exporter who is concerned about recent news reports of a record coffee harvest in the current year from South America and its potential effects on future coffee prices. After seeking your advice, Stan has decided to undertake the following strategy to protect his current coffee holdings against an expected decrease in prices:
1 Sell 4 coffee futures contracts today (3 October 2014).
2 Buy back 4 coffee futures contracts on 30 December 2014 just prior to the expiry of the contract.
The relevant price information for coffee futures contracts are as follows:
$$\begin{array} { | l | l | l | }
\hline \text { Date } & \text { Details } & \text { Amount (\$) } \
\hline \text { 3 Octaber 2014 } & \begin{array} { l }
\text { 1 Coffee futures contract } \
\text { (5 \%/ deposit required) }
\end{array} & \mathbf { \$ 4 0 0 0 0 } \
\hline \text { 30 December 2014 } & \text { 1 Coffee futures cantact } & \mathbf { \$ 3 8 5 0 0 } \
\hline
\end{array}$$ Determine whether Stan was successful in protecting against an expected decrease the coffee price as evidenced by his approximate realised return calculated on:
a) - a 3 monthly basis, and
b) - an annualised basis.

Question

Stan Dover is a coffee exporter who is concerned about recent news reports of a record coffee harvest in the current year from South America and its potential effects on future coffee prices. After seeking your advice, Stan has decided to undertake the following strategy to protect his current coffee holdings against an expected decrease in prices:
1 Sell 4 coffee futures contracts today (3 October 2014).
2 Buy back 4 coffee futures contracts on 30 December 2014 just prior to the expiry of the contract.
The relevant price information for coffee futures contracts are as follows:
 $$\begin{array} { | l | l | l | } 
\hline \text { Date } & \text { Details } & \text { Amount (\$) } \
\hline \text { 3 Octaber 2014 } & \begin{array} { l } 
\text { 1 Coffee futures contract } \
\text { (5 \%/ deposit required) }
\end{array} & \mathbf { \$ 4 0 0 0 0 } \
\hline \text { 30 December 2014 } & \text { 1 Coffee futures cantact } & \mathbf { \$ 3 8 5 0 0 } \
\hline
\end{array}$$ Determine whether Stan was successful in protecting against an expected decrease the coffee price as evidenced by his approximate realised return calculated on:
a) - a 3 monthly basis, and
b) - an annualised basis.

Quizplus · Accepted Answer

The Answer of Stan Dover is a coffee exporter who is concerned about recent news reports of a record coffee harvest in the current year from South America and its potential effects on future coffee prices. After seeking your advice, Stan has decided to undertake the following strategy to protect his current coffee holdings against an expected decrease in prices:
1 Sell 4 coffee futures contracts today (3 October 2014).
2 Buy back 4 coffee futures contracts on 30 December 2014 just prior to the expiry of the contract.
The relevant price information for coffee futures contracts are as follows:
 $$\begin{array} { | l | l | l | } 
\hline \text { Date } & \text { Details } & \text { Amount (\$) } \
\hline \text { 3 Octaber 2014 } & \begin{array} { l } 
\text { 1 Coffee futures contract } \
\text { (5 \%/ deposit required) }
\end{array} & \mathbf { \$ 4 0 0 0 0 } \
\hline \text { 30 December 2014 } & \text { 1 Coffee futures cantact } & \mathbf { \$ 3 8 5 0 0 } \
\hline
\end{array}$$ Determine whether Stan was successful in protecting against an expected decrease the coffee price as evidenced by his approximate realised return calculated on:
a) - a 3 monthly basis, and
b) - an annualised basis.

Stan Dover Is a Coffee Exporter Who Is Concerned About