Final answer:
Coca-Cola can hedge against sugar price volatility by either buying sugar futures contracts or entering into a forward contract to purchase sugar at a set price in the future. Both these strategies allow the company to lock in a purchasing price and avoid the risk of paying higher prices due to market fluctuations.option e is correct answer.
Step-by-step explanation:
Hedging Strategies for Coca-Cola's Sugar Price Volatility
When considering hedging strategies for Coca-Cola to mitigate the risk of sugar price volatility, it's important to understand the two main financial instruments that can be used: futures contracts and forward contracts. Given that Coca-Cola requires sugar for its soft drink production, the company would be looking to secure a stable and predictable price for sugar in the future to avoid unexpected costs due to price fluctuations.
Therefore, the valid strategies for Coca-Cola to hedge against rising sugar prices would include:
- "Buy" sugar futures contracts (i.e., taking a "buyer's" position in a futures contract), which means that Coca-Cola would agree to purchase sugar at a predetermined price on a specified future date, regardless of the fluctuating market price.
- Enter into a forward contract in which the firm agrees to buy sugar at a set price in the future. This is a customized contract between two parties, where Coca-Cola would agree on the price and quantity of sugar to be purchased at a date in the future, effectively setting the cost in advance and avoiding uncertainty.
Both strategies provide a hedge against the risk of sugar prices increasing since they allow Coca-Cola to lock in a specific purchasing price. Hence, the correct answers are that Coca-Cola should either "Buy" sugar futures contracts or enter into a forward contract to purchase sugar at a predetermined price, making options b and d both right strategies.