Essay Business Case Hedging Coffee Prices

2857 Words Nov 20th, 2013 12 Pages
Business Case

Christof Feichtinger
Cafe de Guatemala

Hedging Price Fluctuations of the Coffee Markets with the Help of Future Contracts

Table of Contents
1. The Business Case - A Short Overview 1
2. About futures markets 1
2.1. Price risk 2
2.2. Volatility 2
2.3. Leverage 2
3. Organization of futures market 2
4. The New York Arabica Contract 2
4.1. Trading Hours, Quotations, Price Fluctuation Limits 2
4.2. Deliveries, Tenderable Growths and Differentials 2
4.3. Integrating Futures and Cash Markets: The eCops System 2
5. The Mechanics of Trading in Futures 2
6. Hedging against rising coffee prices 2
6.1. A Hedging Example 2
6.2. Suggestions for the Company 2

1. The Business Case - A Short Overview
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Coffee futures can best be defined as a representation of coffee:
„that will become available at some point in the future, based on standard contracts to deliver or accept a pre-determined quantity and quality of coffee at one of a known range of delivery ports.“
The only agreements necessary at the conclusion of a contract are the delivery period according to a specific calendar („trading positions“) and the delivery price, which is determined at the „time of dealing“ by different market forces. Today also the access to the price information became easier due to the growing importance of the internet. In general, all of the exchanges have their own website and are providing recent price quotations with a delay of approximately 20 to 30 minutes for the public and up-to-the-minute information for subscribers paying a monthly fee.
Coffee futures market: Participants buy and sell prices for a standardized quality of coffee. The price is determined in an open auction. In general futures contracts can be defined as:
„a standardized legal commitment to deliver or receive a specific quantity and grade of a commodity or its cash equivalent on a specified date and at a specified delivery point.“
Instead of trading real coffee, traders are mostly interested into risk management, investment opportunities and offsetting sales. Often, these contracts do not lead to the delivery of physical

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