An organic Tofu manufacturer needs to purchase a 200,000 bushels of high-quality organic soybeans in 2 months.
However, the futures market deals with low-quality soybeans (not organic). As regards, this organic Tofu manufacturer decides to use the low-quality soybeans for hedging. Using some historical data, we have found that the standard deviations and correlations as follows:
- σs = 0.0363 σF = 0.0422 and ρ = 0.982
Each soybean contract is traded by the CME group is on 5,000 bushels. What should be hedging strategy for this organic Tofu manufacturer to lock in a price? Would she have to short or long soybean futures contract? And how many number of contracts should she short/long?