Risk reward trade-off

in hedging

Presented by:
Desmond Alfred Peprah
Group 3 Richard Agyemang-Opambour
Francis Wayem
Richmond G. Boateng
Managing risk and uncertainties
 Ordinarily we will buy a cocoa futures contract to
hedge against future price changes of the underlining
asset.

 The aim is to minimize uncertainties which can affect

business operations.

 An alternative way hedging against risk is buy a put

option of the futures contract of the underlining asset.

 Another name is going long

 Long Cocoa Put Option
Observations:
Euronext Cocoa futures contract trading at £1,812.00 per
tonne.

Euronext put option trading at £1,800.00

 Underlining asset: Euronext Cocoa futures contract
 Trades at 10 tonnes per contract
 Price £120.8 per tonne
 Premium of £1208.00

Assuming at expiration, the price of underlying cocoa futures trades

at 1,540.00 (15% )
•
Gain from Put Option Exercise
By exercising the put option now;
– We exercise the put option contract to close the transaction the strike
price of £1,800.00
– We enter a long cocoa futures contract at the market price of £1,540.00
– Profit of (£260.00 x 10)- £1,208.00 = £1,392.00
– The put option is in-the-money.

Description Details Amount £

Put option strike price (1800*10) 18,000.00
Less market price of cocoa futures contract (1540*10) 15,400.00
Gross profit 2,600.00

Less Investment
Premium (10*120.8) 1,208.00

N et Gain/ profit 1,392.00

ROI (1392/ 1208) 115%

 Sell-to-close Put option
• In practice, the put option position is closed via a
sell-to-close transaction on the options market
(Euronext).

• Included in the proceeds of the sale is any time

value if there is some tile left to maturity (T-t).

• The amount received is the intrinsic value.

THANK YOU!