After an analysis of political currents in Central and South America, you conclude that future coffee prices will be lower than currently indicated by futures prices. Would you go long or short? Analyze the impact of a swing in coffee prices of 10 cents per pound in either direction if you have a 10-contract position, where each contract calls for delivery of 37,500 pounds of coffee.

Question

Cristal Carrillo

Business

23 September, 03:54

After an analysis of political currents in Central and South America, you conclude that future coffee prices will be lower than currently indicated by futures prices. Would you go long or short? Analyze the impact of a swing in coffee prices of 10 cents per pound in either direction if you have a 10-contract position, where each contract calls for delivery of 37,500 pounds of coffee.

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Answers (1)

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Bugsy · Answer 1

a. Short futures

b. $37,500

Explanation:

Since the price of the future coffee would be lower than the future prices so it would reflect the short futures, not the long futures

And, the impact would be

= Number of coffee pounds * number of contract position * coffee price per pound in cents

= 37,500 pounds * 10 * 0.10

= $3,7500

We simply multiply the coffee pounds, contract position and per pounds in cents so that the accurate value can come.